Kardec Trader uses a car-purchase analogy to explain options trading: a $500 premium controls a $50,000 car for three weeks. If the car rises to $70,000, you profit $20,000 while risking only that $500.
$50,000
$500
Three weeks
$70,000
$20,000
Let's say you're looking to buy a car, right? And the car value is 50,000. You want to buy the car, but you're not sure, so you put something called a deposit down. Your deposit, let's say, is $500. That is going to be your premium. This is going to be your strike price. And then we have an expiration. So your expiration, let's say, is three weeks, which means the dealer can't sell the car to anyone else for this time period. And this is the amount that you are controlling $50,000 with. Let's say somehow the car becomes an antique. They're them anymore. The value soars up to like 70, 80,000. So let's say it goes up to 70,000. Your only risk was 500. With that 500 risk, now you go back into the dealership, you buy the car, and your profit is going to be $20,000. You're not risking putting in complete 50,000. You're only risking $500. And this is where options shine, because it lets you control a very expensive asset for a much cheaper price.
