Free Trading School · Level 13: Trading Different Markets
Options: the basics
An option gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price, the strike, before a set date, the expiry. The buyer pays a premium for that right.
| Position | You expect | Maximum loss | Maximum gain |
|---|---|---|---|
| Buy a call | Price rises | Premium paid | Large |
| Buy a put | Price falls | Premium paid | Large (to zero) |
| Sell a call (uncovered) | Price stays below strike | Unlimited | Premium received |
| Sell a put | Price stays above strike | Large | Premium received |
- Time decay: options lose value as expiry approaches, all else equal.
- Implied volatility: options get more expensive when big moves are expected, for example before earnings.
- Most options bought by beginners expire worthless; direction alone is not enough, timing and size of the move matter.
Selling options can carry very large or unlimited risk. Learn with small, defined-risk positions or on paper first.
Options are powerful tools with their own rules. Master stocks or ETFs first, then study options in depth.
Quick answers
An option gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price, the strike, before a set date, the expiry. The buyer pays a premium for that right.
Options are powerful tools with their own rules. Master stocks or ETFs first, then study options in depth.
The premium paid. An option buyer can only lose what they paid for the option.