What Options Are

An option is a financial contract that gives you the right, but not the obligation, to buy or sell an asset (like a stock, ETF, or index) at a specific price (called the “strike price”) on or before a certain expiration date. Think of it like paying a deposit to lock in a price for a potential future transaction. There are two main types: a “call option” gives you the right to buy the asset, betting its price will go up.
A “put option” gives you the right to sell the asset, betting its price will go down. The cost of the option itself is known as the “premium.”

The Purpose and Key Risk

Traders use options for two primary reasons: to speculate on price movements with more potential leverage than buying the stock outright, or to hedge and protect their existing investments from losses (like an insurance policy).
The major attraction is that your potential loss is limited to the premium you paid for the contract itself.
However, this also means the odds are often stacked against the buyer, as the asset must move enough in the right direction before the expiration date to make the trade profitable. For this reason, options are significantly more complex and risky than simply buying stocks.

Disclaimer: All content on this platform is strictly educational. Trading involves risk, and success depends on individual effort, market conditions, and applied knowledge.