What is Options?

The word “option” means a choice — and that’s exactly what options trading is about.

The buyer pays for the right to make a choice later (to buy or sell a stock), while the seller agrees to fulfill whatever the buyer chooses — in return for a fee upfront called premium.

Think of it this way:

When you buy insurance, you pay a premium to the insurance company. You might never make a claim, but if something bad happens, you can exercise your right and claim compensation.

• The maximum loss for the buyer is the premium paid
• The potential gain happens if the buyer decides to exercise the right at a profitable time.

For the seller (like the insurance company):

• They receive the premium upfront, and that’s their maximum profit.
• But if the buyer exercises their right (like claiming insurance), the seller has to cover the cost, which could be much more than the premium received.

• Pays a premium
• Has the right to buy/sell the stock
• Limited loss (just the premium), but unlimited potential gain

• Gets the premium upfront
• Has the obligation to buy/sell the stock if buyer chooses
• Limited gain (only the premium), but potential for large losses

📄 All Terms Are Written in a Contract

Just like an insurance policy, every option trade is defined by a contract. This contract includes:

• The premium (the price the buyer pays)
• The strike price (the fixed price at which the buyer can buy or sell the stock)
• The expiry date (the deadline by which the buyer must decide)

Once the contract expires, the choice goes away. If the buyer doesn’t take action before then, the seller keeps the premium and nothing more happens.

There are two types of Options, i.e. Call (right to buy) and Put (right to sell). In my next post, and how traders use them to manage risk or generate income — just like how insurance works in everyday life.