Lesson 10 of 14 · 2 min
How options work
Calls, puts, premium, strike and expiry — and why buying and selling options carry very different risks.
An option gives the buyer the right, but not the obligation, to buy or sell something at a set price before a set date.
The basics
- Call — the right to buy at the strike price. Profits if price rises enough.
- Put — the right to sell at the strike price. Profits if price falls enough.
- Strike — the agreed price.
- Expiration — the date the right ends.
- Premium — the price of the option.
Buyer vs seller
| Option buyer | Option seller | |
|---|---|---|
| Pays or receives | Pays the premium | Receives the premium |
| Max loss | The premium paid | Can be very large (unlimited for uncovered calls) |
| Time | Works against you (decay) | Works for you |
Why options trip up beginners
Price can move in your direction and the option can still lose money — because time passed or volatility dropped. Options have three moving parts: price, time and volatility.
Why futures traders care
Even if you never trade an option, options positioning and dealer hedging can influence how index futures move. The Options track covers that.
Quick recap
- Calls = right to buy, puts = right to sell.
- Buyers risk the premium; sellers can risk far more.
- Price, time and volatility all move an option's value.
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