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What is an options contract?
An options contract gives its buyer the right, but not the obligation, to buy or sell an asset at a fixed price, the strike price, on or before a set date. The buyer pays the seller an upfront fee, the premium; the seller must perform if the buyer exercises.
What it means for you
Buying an option risks the whole premium: if it expires out of the money, it is worth nothing. Selling, or writing, an option collects the premium but can expose you to large or even unlimited losses. Prices can swing hard near expiry, and an option's value depends on time left and volatility, not just the asset's price.
A common mistake: “Options are low risk because you can only lose the premium.”
In fact: That holds only for buyers. Sellers of options can face losses far larger than the premium collected, in some cases unlimited, as the SEC warns.
How it works
There are two basic types: calls, the right to buy, and puts, the right to sell. The premium depends on the asset's price relative to the strike, the time until expiry, and the asset's volatility. A holder can close by selling the same option, or exercise it; the writer then receives an assignment and must fulfil the contract. Options are derivatives: their value comes from the underlying asset. Unlike a futures contract, the buyer is never obliged to trade. Brokers generally require a margin account to trade options.
Sources: SEC Investor Bulletin: An Introduction to Options, CFTC Glossary, SEC Investor Bulletin: Understanding Margin Accounts · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.