Option
Pay a premium for the right, never the obligation, to deal later at a set price.
An option buys the right without the obligation to deal at a set price before expiry. Buyers risk the premium. Time decay works against them daily.
An option is a contract paying a premium today for the right, but never the obligation, to buy (call) or sell (put) an asset at a set strike price before expiry. Buyers risk only the premium; sellers collect it and carry the risk. Time decay eats buyer value daily, which is why most retail option buying funds professional sellers.
How It Works
- Premium buys rights expiring worthless or in profit
- Strike sets the deal level, expiry sets the deadline
- Volatility inflates premiums before events
Trading Tips
Buy options for defined-risk direction, never as lottery tickets
Avoid holding through decay into range-bound expiry
Learn one structure deeply before collecting strategies
Option Example
Say shares trade $100 and a $105 call costs $3 expiring in a month. Stock rallies to $115 and the call is worth $10-plus: triple on a 15% move. Stock stalls at $102 and the $3 simply evaporates by expiry.
How Traders Use Option
Buy options when expecting movement with a deadline, and size premiums like fully losable stakes. Selling premium is a business requiring margin, math and respect for gap risk.
Related Terms
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