An option is a contract, not a share of stock and not a futures position. It gives its buyer a right — never an obligation — to do something at a fixed price before a fixed date. That single asymmetry is what makes options fundamentally different from every other instrument a retail trader touches.
Calls: The Right to Buy
A call option gives the buyer the right to purchase 100 shares (or the equivalent underlying unit) at the strike price on or before expiry. Buying a call is a bet that the underlying rises above the strike by enough to cover the premium paid.
Puts: The Right to Sell
A put option gives the buyer the right to sell the underlying at the strike price on or before expiry. Buying a put is a bet the underlying falls, or it can be used as insurance against a long stock position — capping the downside for the cost of the premium.
The Four Basic Positions
| Position | View | Max Loss | Max Gain |
|---|---|---|---|
| Long Call | Bullish | Premium paid | Unlimited |
| Short Call | Bearish/neutral | Unlimited | Premium received |
| Long Put | Bearish | Premium paid | Strike − premium |
| Short Put | Bullish/neutral | Strike − premium | Premium received |
A long call or put can never lose more than the premium paid. A short (naked) call has theoretically unlimited risk, and a short put's risk is capped only by the underlying going to zero. Beginners routinely underestimate this asymmetry.
Contract Mechanics
- ▸One standard equity option controls 100 shares of the underlying.
- ▸Strike price: the fixed price at which the underlying can be bought or sold.
- ▸Expiry: the date the contract stops existing — American-style options can be exercised any time before expiry, European-style only at expiry.
- ▸Exercise: the buyer invokes their right; assignment: the seller is forced to fulfill the obligation.
Why Traders Use Options
- 1.Leverage — control 100 shares for a fraction of the capital of owning them outright.
- 2.Hedging — protect an existing position against adverse moves.
- 3.Income — collect premium by selling options against a portfolio.
- 4.Speculation with defined risk — a long option's loss is capped at the premium.
Every strategy in the options universe — spreads, straddles, covered calls, collars — is just a combination of these four basic building blocks. Master what a long call, short call, long put, and short put each do to your risk profile, and every complex strategy becomes readable.