What Are Options?
Definition
An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time period.
Key Components of an Option
| Component | Description |
|---|---|
| Underlying Asset | The security (stock, ETF, index) that the option is based on |
| Strike Price | The price at which you can buy or sell the underlying |
| Expiration Date | When the option contract expires |
| Premium | The price paid for the option |
| Contract Size | Typically 100 shares per contract |
Why Trade Options?
- Leverage: Control more shares with less capital
- Hedging: Protect existing positions from losses
- Income: Generate income by selling options
- Flexibility: Profit in any market direction
Risk Warning
While leverage can amplify gains, it also amplifies losses. Options can expire worthless, resulting in a 100% loss of the premium paid. Only trade with capital you can afford to lose.
Options vs. Stocks
| Aspect | Stocks | Options |
|---|---|---|
| Ownership | You own shares | You own a contract |
| Expiration | No expiration | Has expiration date |
| Capital Required | Full share price | Premium only |
| Dividends | Receive dividends | No dividends |
| Voting Rights | Yes | No |