Options Are Like Insurance
Understanding how options protect your investments just like insurance protects your assets.
Let's Start with Car Insurance
You pay a monthly or yearly premium to an insurance company. Why? To protect yourself from a massive financial loss if you crash your car. You pay a small amount now to avoid a huge cost later.
How Premiums Work
Scenario 1: Nothing Happens
You drive safely. You don't crash. The insurance company keeps your premium. You paid for peace of mind.
Scenario 2: The Accident
You crash. The damage is $8,000. The insurance company pays it.
Now Apply This to Stocks
What if you could buy insurance for your stock portfolio?
That's What Options Are
If you own Apple stock and you're worried it might crash, you can pay a "premium" to insure it. If it crashes, the option pays you back. If it doesn't, you just lose the premium.
Option Seller
Acts like the Insurance Company. They collect premiums and hope nothing bad happens.
Collects CashOption Buyer
Acts like the Policyholder. They pay premiums to protect their downside or bet on big moves.
Pays for Protection