Indeed. it was an Explain Like I'm Five explanation. I have learned far more than I've ever cared to learn about pricing options. Actuaries get paid well in part because the exams are difficult. :)
Also, the timing is only applicable to European options which expire on a specific date. American options have no expiration date!
> Also, the timing is only applicable to European options which expire on a specific date. American options have no expiration date!
Umm, American options still have an expiry date. They can be called earlier than their expiration date, though unless there is a dividend to be paid, its never advantageous to do so.
But American options absolutely have an expiration date. They wouldn't make sense otherwise.
I mean at price would you sell someone a put or a call if they could wait forever to exercise it?
No matter what implied vol you put on the underlying, you would still have to price it at infinity wouldn't you?
The tl;dr is it's a way to be short a stock with more limited risk, but with the added variable of having to be right on timing.