Options are contracts that give the right — but not the obligation — to buy or sell an asset at a set price by a set date. They are powerful, flexible, and easy to misuse. This lesson builds the vocabulary; it is not a trading recommendation.
Calls and puts
- Call — the right to buy at the strike price. Gains if the asset rises.
- Put — the right to sell at the strike price. Gains if the asset falls (or as insurance).
Every contract has a strike (the agreed price) and an expiration (the deadline). One equity option usually controls 100 shares.
Why people use them
| Goal | Example use |
|---|---|
| Leverage | Control more exposure for less capital (with more risk) |
| Income | Sell covered calls against shares you own |
| Hedging | Buy puts as insurance on a holding |
The price has moving parts
An option’s premium reflects more than the stock price:
- Intrinsic value — how far in-the-money it already is.
- Time value — more time to expiration costs more, and decays as expiration nears (theta).
- Implied volatility — expected future movement; higher IV means pricier options.
The risk reality
Buying options has defined risk (the premium) but they can expire worthless — you can be right on direction and still lose to time decay. Selling options can carry large or even undefined risk. Never sell options you do not fully understand, and never use leverage you cannot cover.
A sane on-ramp
- Learn by paper trading first.
- Start with defined-risk strategies you can fully explain.
- Size positions with the same risk rules as any trade.
A diversified index portfolio requires zero options. Treat them as an advanced, optional tool — not a shortcut.