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What are options and how do they work?​

Options are contracts that give someone the right—but not the obligation—to buy or sell something (usually a stock or ETF) at a specific price within a set period of time.

There are two main types of options: 

A simple example: 

  • If an investor has a call option to buy a stock at $50 and the stock rises to $70, the investor can still buy it at $50 and sell it for $70, making a profit. 
  • If an investor has a put option to sell a stock at $50 and the price drops to $30, the investor can still sell it for $50, which protects from the loss. 
  • However, if an options contract is “out of the money” at expiration, meaning it has no intrinsic value because exercising it would not be profitable, the contract simply expires worthless. In that case, the investor’s loss is limited to the premium originally paid for the contract. 

Options are used in buffered ETFs to: 

  • Limit losses (by purchasing put options) 
  • Fund protective strategies (by selling call options and using the premiums received) 
  • Control the potential range of returns 

The premiums collected from selling call options help finance the purchase of protective puts and other option positions. Together, these contracts form the building blocks that allow ETF managers to shape the balance of risk and reward in a buffered product like ARK DIET.