Hey Magic -
You don't sound ignorant - you are one of the most astute traders around Ihub IMO. This will be my second attempt to explain clearly - it took me many more than 2 times to get it myself (many, many more times!)
Ok, first of all, there are 2 main types of options to discuss (we will wait a LONG time to discuss the others - which I never play).
They are the "American" and "European" types or styles - though they really have nothing to do with country of origin.
A European option may be exercised only at the expiry date of the option, i.e. at a single predefined point in time.
An American option on the other hand may be exercised at any time before the expiry date.
American options expire the third Saturday of every month.
European options expire the Friday prior to the third Saturday of every month.
Your accounts option web page will either say which style or you can check the expiration date and that will tell you (lots are American style).
If I may suggest - forget thinking about "if the strike price is achieved" as many out of the money options will bring you good % returns. And in the investing world, nearly all options are traded and not exercised. There are times when you may want to and we can talk about that another time - I personally have never exercised one and must say that it is a low % that are exercised.
OK - here is an example from the internet:
"Look at the following example: you are about to buy a violin for your daughter who takes music classes. Having studied the offerings, you pick an instrument from a flea market. It costs $50. Yet you cannot decide for sure whether to buy it or not. So you conclude a contract with the owner giving you an opportunity to purchase it by the end of a set term (say, a week, though in reality it is usually about 3 months) for these $50 (the strike price). We pay $5 for this option. In option trading, option's total cost , the premium, is determined by such factors as the asset price, strike price and time remaining until expiration. Now you are the option holder and have the right, but not the obligation to buy it within the agreed period of time.
Two days later, it is discovered that the violin used to belong to a great musician and is of great cultural value. Its price immediately soars up to $500. As you have the option to buy it for $50 you quickly exercise it. The former violin owner (the writer) is obligated to sell it now. Your profit here equals $445, which is $500 - $50 (strike price) - $5 (option price). Your call option (in option trading call is another word for buy) is in the money. Should the violin turn out to be a low-quality fake, you wouldn't have to purchase it, losing only $5 at that"
The thing I don't like about this example is that it doesn't show what really would happen. That being (if the violin was an option) that we would not exercise our deal with the violin seller, rather we would sell it to someone who thought it was worth more than $500.
If this doesn't help, we will try again! You have to say that you don't get it many more times to equal how many times it took me - and I had a good communicator talking to me - you don't haha!!
Let me know - its no problem. This is an education board and I have a bunch of things to ask you!
AI
