Options

Options are financial derivatives that grant you the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) before or at the expiration date.

The most common type of option is a stock option. This security gives the holder the right, but not the obligation, to buy or sell a specific number of shares (usually 100) of a certain stock at a specified price (strike price) before a specified date (the expiration date). Listed tenors — the time from listing to expiration — run from same-session expirations through weeklies and monthlies out to LEAPSs of roughly three years (long-dated options, covered later in this chapter), and the tenor you choose is a bigger determinant of the trade’s behavior than the strike.

Leverage

Options allow for significant leverage, meaning small price movements in the underlying asset can result in large percentage changes in the value of the option. Buying call options can provide substantial returns if the underlying asset appreciates, while the maximum loss is limited to the premium paid.

Expiration

Options have an expiration date, after which they become worthless if not exercised.