Options are financial contracts that give the buyer the right — but not the obligation — to buy or sell an asset at a predetermined price, before a set expiry date. They're used by everyone from retail day traders to institutional fund managers for speculation, hedging, and income generation. They're also one of the fastest ways to lose money if you don't understand the mechanics.
A call option gives you the right to buy shares at the strike price. You buy a call when you're bullish — if the stock rises above the strike, your option gains value. A put option gives you the right to sell shares at the strike price. You buy a put when you're bearish — if the stock falls below the strike, your put gains value.
| Term | Meaning |
|---|---|
| Strike price | The price at which you can exercise the option |
| Premium | What you pay for the option — your maximum loss as a buyer |
| Expiry date | The date the option ceases to exist; after this, it's worthless if unexercised |
| In-the-money (ITM) | Call: stock above strike. Put: stock below strike. Has intrinsic value |
| Out-of-the-money (OTM) | Call: stock below strike. Put: stock above strike. Only time value remains |
| At-the-money (ATM) | Stock price equals strike price |
| Intrinsic value | The immediate exercise value — how much ITM the option is |
| Time value | The portion of premium beyond intrinsic value — decays to zero at expiry |
Every day that passes, an option loses some of its time value — a process called theta decay. An option with 60 days to expiry has more time value than the same option with 10 days. As expiry approaches, time value erodes faster and faster, accelerating in the final 30 days. This is why buying OTM options (all time value, no intrinsic value) requires the stock to move enough, fast enough, to overcome the decay. Most OTM options expire worthless.
Options leverage — the real risk: a call option on a £50 stock might cost £3. If the stock rises to £60, your option might be worth £12 — a 300% return. If the stock stays flat or rises only slightly, your option expires worthless — a 100% loss. The leverage that creates spectacular wins also creates spectacular losses. Most retail options traders lose money. Start by understanding the vocabulary and structure; never trade options until you fully understand what you're buying.
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