It is as retarded as it is complex. The reason they allow it is there is a cost for an option contract, a fee as you say, so they make money on allowing your bet. Under the covers, they usually have some of the stock and never sell it they just give you the $ value, OR they have no stock and place their own bet against your position. So they make the fee, and if the stock goes up and they had it, they never sold it ($++), and if the stock goes down and they never had it they placed an opposite bet to cover their "loss" ($++). There is almost no way to lose in a normal situation for them, unless they get too greedy in the second scenario (the one where they have no stock) and they place their bets with other "clearing houses" that _also_ hold little to no stock.