Option

An option has an underlying asset, such as a share or index, a strike price at which the asset can be bought or sold, and an expiry date. A call option gives the right to buy; a put option gives the right to sell. The buyer pays the seller, also called the writer, a price known as the premium. American-style options can be exercised at any time up to expiry, European-style options only at expiry. Exchange-traded options are standardised, each typically covering a fixed number of shares, and many are settled in cash rather than by delivering the asset.

The premium has two parts: intrinsic value, what the option would be worth if exercised now, and time value, which reflects the chance of a favourable move before expiry and shrinks as expiry approaches. Options are used to hedge, to earn income, or to speculate with leverage. For a buyer, the most that can be lost is the premium, though options often expire worthless. For a seller, losses can be large and can far exceed the premium received; selling call options without owning the asset exposes the seller to losses that are unlimited in theory. Brokers typically check a client's knowledge and experience before allowing options trading.