Rookie trying to understand assignment in options trading (have not bought and don't plan to purchase options for a while until I get a good understanding on things).

What I understand so far is that there are 3 things one can do with an options contract:

Can let the contract expire worthless; can exercise the contract; can sell it back to the market.

Aside from all the technical things I'm most curious at this point about one being assigned, cause I think this will help clear up some misconceptions I have about options.

What I understand so far about being assigned, is that it occurs only when, say I sell a contract that is in the money and the person I sell it to decides to exercise it, and assignment means that the seller of the contract then owes the buyer (who just exercised the contract) 100 times the strike price times number of contracts. This does not really make sense to me but that's how I understand things.

Going further, help walk me through a couple of examples. There are components of the process that are still fuzzy for me..

Say I buy one call option with a strike price of $250 and the contract is $1. Purchasing one of these contracts is therefore $100: I am paying $100 as a sort of down payment for the right, but not the obligation, to exercise the contract which would enable me to buy 100 shares of this stock at $250. So, if the stock goes up to $280 before the contract expires, I have the ability to exercise and pay $25,000 for 100 shares the stock instead of paying $28,000.

So, what if I do not want to exercise the contract and just want to sell it back to the market (because I may not have $25,000 but still want to make a profit). So say that the stock does go up to $280 before the contract expires, which in turn will raise the value of the contract and where I would expect to make a return. I am not sure how much I would make if this was the case, but say I do sell it back to the market.

What I understand is that with the sale of this contract there is someone buying it. Now, if the buyer of the contract I just sold decides to exercise it, that means that I would be assigned, correct? And being assigned the contract means that I would then owe the buyer $25,000?? If I bought the contract for $1 and it goes up to what, $3, that means that by selling it back to the market I would make a profit of $200. So I'd then owe some person $24,800. Why ever sell a contract?? But this can't be how it works...

What am I missing here?

Thanks.

Submitted May 28, 2018 at 09:04AM by dalastspartan https://ift.tt/2LC9DlI