Key takeaways
- A bought option risks only the premium; sold options can risk much more.
- Always compute breakeven before trading.
- Per-contract commissions and multiplier matter when comparing brokers.
An option gives the buyer the right, but not the obligation, to buy or sell an asset at a set price before a set date. The price paid for that right is the premium. The seller takes on the obligation in exchange for the premium.
| Term | Meaning |
|---|---|
| Call | Right to buy at the strike price |
| Put | Right to sell at the strike price |
| Strike | The agreed price |
| Expiry | Last date the option can be used |
| Premium | Price of the option, quoted per share |
| Contract size | Listed US equity options usually cover 100 shares |
A breakeven example
A call option with a 50 strike costs 2.00 per share. One contract controls 100 shares, so the premium is 200. The share must finish above 52 at expiry for the trade to profit, ignoring fees. Below 50 the option expires worthless and the maximum loss is the 200 premium.
Before placing a first options order
- Know the contract multiplier. Fees and risk scale with 100 shares per contract.
- Calculate breakeven and maximum loss. For bought options the loss is capped at the premium.
- Check commissions per contract. Small per-contract fees add up across several legs.
- Understand assignment risk. Sold options can be exercised against you.Tip: Strategies with sold options need extra approval at most brokers.
ComplexityOptions can expire worthless and sold options can lose more than the premium received. Practise on a demo before using real money, and read the standard options risk disclosure document.