Options
TradingDefinition
A contract that gives the buyer the RIGHT (but not the obligation) to buy or sell a stock at a fixed price within a fixed time window. Think of it like a reservation. You pay a small fee now to lock in the right to act later if things go your way.
A call option is a reservation to BUY shares at a set price. Traders use it when they think a stock will go up. A put option is a reservation to SELL at a set price. Traders use it to bet a stock will go down, or to insure shares they already own.
Options are powerful because the fee (called the premium) is small compared to the amount of stock you control. The catch: if the stock does not move enough in your favor before the contract expires, the option becomes worthless and you lose the entire premium.
A call option is a reservation to BUY shares at a set price. Traders use it when they think a stock will go up. A put option is a reservation to SELL at a set price. Traders use it to bet a stock will go down, or to insure shares they already own.
Options are powerful because the fee (called the premium) is small compared to the amount of stock you control. The catch: if the stock does not move enough in your favor before the contract expires, the option becomes worthless and you lose the entire premium.
Formula
Option value = Intrinsic value + Time value
Call intrinsic = max(Stock price - Strike price, 0)
Put intrinsic = max(Strike price - Stock price, 0)
Call intrinsic = max(Stock price - Strike price, 0)
Put intrinsic = max(Strike price - Stock price, 0)
Example
AAPL is trading at $180. You buy one call option to buy AAPL at $185 within the next 30 days. The option costs $3 per share, and since one contract covers 100 shares, your total cost is $300. If AAPL rises to $200 by expiration, your option is worth $1,500 (a 5x return). If AAPL stays below $185, you lose the full $300 and walk away with nothing.