What Is Options Contract?
An options contract gives the buyer the right — but not obligation — to buy (call) or sell (put) an underlying asset at a specific price (strike) by a specific date (expiration). The buyer pays a premium for this right.
Calls profit when the underlying price rises above the strike + premium paid. Puts profit when the underlying falls below the strike − premium.
Options allow leveraged exposure with capped downside (you can only lose the premium paid). They also enable income strategies (selling premium) and complex multi-leg trades (spreads, condors, butterflies).
Risks for buyers: options decay over time (theta). Most options expire worthless. The leverage that lets you double your money also lets you lose 100% of premium in days.
Risks for sellers: unlimited downside on uncovered calls; substantial downside on uncovered puts. Most pro options strategies are spread-based to cap the loss.
For most retail traders, the right starting point with options is buying calls/puts on assets you have a strong directional view on — and accepting that the majority will expire worthless.
Related terms
- Leverage — Borrowed capital used to increase trade size beyond what cash alone allows.
- Volatility — A statistical measure of how much an asset's price varies over a period.
- Long Position — Owning an asset with the expectation that its price will rise.