An option is a contract tied to a stock. One standard contract covers 100 shares.

Call

Gives the buyer the right, not the obligation, to buy the stock at a set price (the strike) until a set date (expiration). Buyers use calls when they expect the stock to rise.

Put

Gives the buyer the right to sell at the strike until expiration. Buyers use puts when they expect the stock to fall, or to protect shares they own.

Premium

The price of an option is the premium. It is quoted per share, so a $2.00 premium on one contract costs $200 (2.00 x 100).

Buying vs selling

Every option has a buyer and a seller. The buyer pays the premium and has the right. The seller collects the premium and has the obligation if the buyer exercises.

Quick example

You buy one call with a $50 strike for a $2.00 premium. You paid $200. If the stock finishes above $52 at expiration, you profit. If it finishes at or below $50, the call is worth nothing and you lose the $200.

Key point. Options are easier to lose money on than stocks. Learn how they work before using real money.

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See it in practice

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Education only, not investment advice. Trading involves real risk of loss, including loss of everything you put in. See the full disclaimer.