The Ugly Truth About Out-Of-The-Money Options

Options enable investors to trade contracts worth 100 shares of stock that expire by a given time. Investors then leverage these contracts by essentially betting on where they think the stock price will be by a given date. New investors turn to options due to their “cheapness” compared to buying underlying shares of stock. If an investor were to buy an option, they could purchase this contract from a seller for a small fee, otherwise known as a premium. With this contract in hand, the investor can then choose to hold the contract until expiration in the assumption that their price selected will have value, or they can sell the contract back into the market for an additional premium to collect. However, investors truly don’t often consider the risks associated with options trading. Let’s take a closer look at a popularly traded stock such as Apple ($AAPL). Currently, $AAPL is trading at $130.81 a share. If I were to own one share of $AAPL, I would have to invest $130.81 to buy a share.