How do options work, in simple terms?
An option is a contract that gives you the right, but not the obligation, to buy (a call) or sell (a put) 100 shares of a stock at a set price (the strike) before a set date (the expiration). You pay a price called the premium for that right.
Think of an option as a stock idea with a clock and a price tag.
A call gains value when the stock rises above the strike. A put gains value when the stock falls below the strike. If you buy an option, the most you can lose is the premium you paid.
The premium has two parts. Intrinsic value is how far the option is already in the money. Extrinsic value is what you pay for time and uncertainty, and it shrinks as expiration gets closer (time decay).
That clock is why an option can lose money even if you are right about direction: if the move comes too late or too small, time decay and falling volatility can outweigh it.
Options carry high risk, including the loss of the entire premium. Beginners usually practice with small, defined-risk positions in a simulator first.
Go deeper
- What an option actually is (free)
- Intrinsic value, extrinsic value & time decay (free)
- What is IV crush?
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