Usually, these are closed out by paying the cash value at the end
Am I understanding this correctly?
I sign a contract with you saying “one year from today, if I decide to sell potatoes to you, you must buy them for $100”. I pay you $10 as consideration for the contract. Next year, if the price of potatoes is $110, I simply decide not to exercise my right. You don’t get potatoes, but you keep your $10.
If the price of potatoes is $90, then I buy potatoes for $90, and you buy them for $100. I broke even. Or more realistically, you send me $10 cash, no actual potatoes change hands.
If the price is $95, then I only lose $5, after you send me $5 back.
If the price is $80, then I made $10 in profit, after you send me $20.
And obviously, you might on-sell that contract, in which case you’re up or down the difference between $10 and whatever you sold it for, and I go to them to sell my potatoes/get my cash back, if the price of potatoes ends up below $100.
Is that right? If so, I have two follow-up questions:
What advantage do shorts have over puts? Both have a maximum profit (I can’t make more than $100 on those potatoes if I put. I can’t make more than the current market price for potatoes if I short.), but one has infinite potential loss, and the other has limited loss.
How does this actually answer @[email protected]’s question? The put still requires you to guess when it’ll crash, doesn’t it? If I predict potatoes’ price will crash within the next year and it doesn’t, I lose $10, even if it crashes 370 days from now, don’t I? This contrasts with regular investing/speculating the price will rise, where if I buy potatoes today for $100, predicting it’ll go to the moon over the next year, but in 365 days, if the price is now $90, I still have the choice to either cut my losses to $10, or keep on, expecting it’ll rise again soon.
Am I understanding this correctly?
I sign a contract with you saying “one year from today, if I decide to sell potatoes to you, you must buy them for $100”. I pay you $10 as consideration for the contract. Next year, if the price of potatoes is $110, I simply decide not to exercise my right. You don’t get potatoes, but you keep your $10.
If the price of potatoes is $90, then I buy potatoes for $90, and you buy them for $100. I broke even. Or more realistically, you send me $10 cash, no actual potatoes change hands.
If the price is $95, then I only lose $5, after you send me $5 back.
If the price is $80, then I made $10 in profit, after you send me $20.
And obviously, you might on-sell that contract, in which case you’re up or down the difference between $10 and whatever you sold it for, and I go to them to sell my potatoes/get my cash back, if the price of potatoes ends up below $100.
Is that right? If so, I have two follow-up questions: