🎯 In 30 seconds: An option is a contract that gives the buyer the right, not the obligation, to buy (call) or sell (put) a stock at a set price by a set date. The buyer pays a premium and can lose all of it. The seller collects the premium and takes on an obligation that can cost far more. Brokers must approve you before you can trade options, level by level.
Calls and puts
| Call buyer | Right to buy the stock at the strike price |
| Call seller | Obligation to sell at the strike price if assigned |
| Put buyer | Right to sell the stock at the strike price |
| Put seller | Obligation to buy at the strike price if assigned |
Other terms you will see: the strike price (the agreed price), the expiration date (the last day the contract is valid), and the premium (the price of the option). A standard US equity option usually covers 100 shares, so a premium quoted as $2 costs $200 per contract.
US equity options are “American-style”: the holder can exercise any time before expiration. Index options are generally “European-style” and settle only at expiration. Options that are in the money at expiration are generally exercised automatically, which can mean you suddenly need the money to buy 100 shares.
Worked example
A stock trades at $48. You buy one call with a $50 strike, expiring in two months, for a $2 premium: $200.
| Stock at expiration | Option worth | Your result |
|---|---|---|
| $45 | $0 | −$200 (lose the whole premium) |
| $50 | $0 | −$200 |
| $52 | $2 × 100 = $200 | $0 (break-even) |
| $60 | $10 × 100 = $1,000 | +$800 |
The stock had to rise more than 8% just for you to break even, and it had to do it within two months. That is how options magnify results: big percentage gains when you are right, a total loss when you are wrong or merely early.
The person who sold you that call kept $200. If the stock went to $60 and they did not own the shares, they would have to buy at $60 and sell to you at $50: a $1,000 obligation for $200 collected. A call sold without owning the stock (“naked”) has no cap on how high the loss can go.
Approval levels
FINRA says your broker must approve your account for a specific level of options trading before you can trade, because some strategies carry substantial risk. You fill out an options agreement covering your experience, income, net worth and goals. Each firm sets its own levels, but they usually run from lower-risk strategies (such as selling covered calls on shares you own, or buying calls and puts) up to uncovered selling, which needs a margin account and the highest approval.
Moneydesks’ Levels of trading guide walks through what each level allows.
Risks to understand first
- Time decay: an option loses value as expiration gets closer, all else equal.
- Total loss is common for buyers: many options expire worthless.
- Unlimited loss is possible when selling uncovered calls.
- Assignment can happen to sellers before expiration on American-style options.
- Wide spreads on less-traded contracts are a hidden cost every time you trade.
- Very short-dated options, including same-day expirations, move fast and can go to zero within hours.
You can practice the stock side with pretend money in the paper-trading portfolio before risking real money.