Options

Options are contracts giving the right, not the obligation, to buy or sell a stock at a set price before a date.

A quick example

Picture this

A trader buys a call option for $200 that controls 100 shares of a $50 stock, betting it will rise within a month. The stock drifts sideways for three weeks — the trader’s thesis is neither right nor wrong — yet the option loses half its value to time decay, then expires worthless when the stock finishes flat. The stock was right; the option was wrong. This is the everyday option scenario: markets that do nothing still punish option buyers, because every passing day burns the premium.

What it means for you

They offer leveraged bets and income strategies beyond owning shares.

How to apply it

Only buy options with money you can lose entirely, and size the premium cost, not the notional exposure. Writing covered calls or selling puts is an income strategy, but it takes on obligation and risk that beginners underestimate.

Common mix-ups

Time decay erodes value daily; most retail options expire worthless.

Key takeaway

Options are leveraged contracts whose value decays daily, and most retail-bought options expire worthless even when the stock moves the right way. The premium you pay buys time and leverage, but time decay and volatility work against you, and a stock can be right while the option still loses. Only buy options with money you can lose entirely, size the premium cost rather than the notional exposure, and understand the worst case before entering. Selling options is income, but it is income for taking real risk.

Definitions reviewed by the Investing Glossary editorial team.