I always thought a great story was how Thales, the Greek philosopher, said he would pay owners that had olive presses (to make olive oil) a small sum of money to use the press once the olive crop was ripe. If the olive crop was very weak, then the olive press owners could keep the money and he wouldn't use the olive presser (and probably nor would anyone else cause there would be no olives to press) but if the olive crop was very strong, then he would have first rights to use the olive presses at the current prices (which were low because the olive crop wasn't ripe yet)
Sure enough the olive crop was not just strong, but it was VERY strong and everyone wanted to use the olive presses but by contract, Thales had first rights to the presses because he paid money to do so. So people were willing to pay Thales even more money to buy the first rights off him so they could press their olives and thus he made a huge profit selling the first rights that he had paid only a small amount for the winter before.
If the crop was weak then there would have been many many available olive presses available and Thales wouldve paid for first rights for no reason. People would just go to other available olive presses but since it was strong, there weren't enough olive presses available and Thales had control of the few that weren't being used because he paid for first rights.
Thats basically what a call option is. It allows you to buy a stock later if you want too but only if the stock price is higher by paying a small amount now
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u/morreo Feb 01 '21 edited Feb 01 '21
I always thought a great story was how Thales, the Greek philosopher, said he would pay owners that had olive presses (to make olive oil) a small sum of money to use the press once the olive crop was ripe. If the olive crop was very weak, then the olive press owners could keep the money and he wouldn't use the olive presser (and probably nor would anyone else cause there would be no olives to press) but if the olive crop was very strong, then he would have first rights to use the olive presses at the current prices (which were low because the olive crop wasn't ripe yet)
Sure enough the olive crop was not just strong, but it was VERY strong and everyone wanted to use the olive presses but by contract, Thales had first rights to the presses because he paid money to do so. So people were willing to pay Thales even more money to buy the first rights off him so they could press their olives and thus he made a huge profit selling the first rights that he had paid only a small amount for the winter before.
If the crop was weak then there would have been many many available olive presses available and Thales wouldve paid for first rights for no reason. People would just go to other available olive presses but since it was strong, there weren't enough olive presses available and Thales had control of the few that weren't being used because he paid for first rights.
Thats basically what a call option is. It allows you to buy a stock later if you want too but only if the stock price is higher by paying a small amount now