What is an Option?
An option is a contract representing the right to sell or buy a financial product. The contract has an agreed-upon term for a set period of time. Options differ from a normal holding since they don't impart ownership. The whole premise of an option is that a holder pays a premium for the right to buy or sell the security within the contracted time frame.
If the market becomes unfavorable, the holder will let the option expire. Majority of the time the premium price will be less that the potential losses of holding the security. On the other hand, market moves favorable, the holder may exercise the contract they have.
You pay a small fee to make a bigger move later if the market is favorable!
Calls and Puts
Options are split into two divisions call options and put options.
A call option is a contract in which a buyer purchases the right to buy a security in the future at a preset price (Strike price). This option is for bullish investors who believe the price of the security will increase.
A put option states the a a buyer acquires the right to sell the security in the future at a predetermined price. This option bearish investor who thinks the price will depreciate.
In the call options world, we have an In-the-money call option where the stock price is above the strike price, At-the-money is where the stock price is at the strike price, and Out-of-the-money where the stock price is below the option price.
In the Put options world, we have the same In-the-money where the stock price is below the strike, At-the-money stock and strike are equal, and Out-of-the-money stock price is above the strike.
Advantages and Disadvantages
Advantages:
- Losses limited only to the option's premium
- Leverage and risk hedging
- Built-in flexibility
- Limited upfront financial commitment
Disadvantages:
- Must meet certain requirements
- Complexity
- More in depth understanding of volatility
- Unlimited risk with profits limited
If you have anymore questions, I recommended looking at Investopedia and NerdWallet.
"Wealth is obtainable, you just have to go a little westward."
Cites:
Mirzayev, Elvin. “Options Trading: How to Trade Stock Options in 5 Steps.” Investopedia, Investopedia, 13 Sept. 2024, www.investopedia.com/articles/active-trading/040915/guide-option-trading-strategies-beginners.asp#toc-biggest-advantagesdisadvantages-of-trading-options.
Schwab.com. “Introduction to Options.” Schwab Brokerage, 2025, www.schwab.com/options/what-is-trading-options.
Horton, Author: Taylor, et al. “Mastering Options Trading: The Ultimate Guide to Options Basics.” Simpler Trading, 25 Aug. 2023, www.simplertrading.com/blog/options.
Rebel Hub Education. “Calls and Puts: The Building Blocks of All Options Strategies.” Market Rebellion, 13 Feb. 2023, marketrebellion.com/training/calls-and-puts-the-building-blocks-of-all-options-strategies/.
Yochim, Dayana. “Risks and Benefits of Trading Options.” Edited by Robert Beaupre, NerdWallet, 6 Jan. 2025, www.nerdwallet.com/article/investing/options-trading-risks-benefits?msockid=314d9bfcb8d46e6225928eabb9ee6f6e.
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