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Option

A contract giving the right, but not the obligation, to trade something at a set price before a set date. The buyer has the right and the seller has the obligation.

Updated 2026-09-05

An option is a contract giving its buyer the right, but not the obligation, to buy or sell something at a set price before a set date. The seller has no right and every obligation, and is paid up front for accepting it.

That asymmetry defines the whole instrument. The buyer's loss is capped at the option premium and the upside is open. The seller's gain is capped at the premium and the downside, for some positions, is not capped at all.

  • A call option is the right to buy. It pays off when the underlying rises.
  • A put option is the right to sell. It pays off when the underlying falls.
  • The strike price is the agreed price, and expiry is the deadline.
Options are the one instrument here where being right about direction is not enough. You have to be right about direction, about size, and about timing, because the contract expires. See gamma and theta.

See also

  • Call option — The right to buy at the strike price. It gains value as the underlying rises, and it expires worthless if the underlying never gets there.
  • Put option — The right to sell at the strike price. It gains value as the underlying falls, which makes it the standard way to buy insurance on a position.
  • Strike price — The price at which an option can be exercised. Its distance from the current price determines almost everything about how the option behaves.
  • Option premium — What the buyer pays the seller for the contract. It is the option's price, and it is made of exactly two things: intrinsic value and time value.

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Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.

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