An option is a contract giving the RIGHT (but not the obligation) to buy (a call) or sell (a put) an asset at a set price (the strike), before an expiry date. That right is bought: it is the premium.
The call: the right to buy
You expect a rise. You buy a call: if the price goes above the strike, your gain grows with it. If it never does, you lose only the premium paid. Capped loss, theoretically unlimited gain.
The put: the right to sell (insurance)
The healthiest use of options for an investor: buying a put amounts to taking out insurance on your portfolio. If the market collapses, the put gains value and cushions the fall. Like any insurance it has a cost, and if nothing happens it expires worthless.
The two faces of leverage
With a few hundred euros of premium, you control an exposure worth thousands. That is what makes options attractive… and dangerous. Leverage amplifies gains AND losses, and an option loses value as time passes (time decay), even if you were right about the direction.
The warning that matters
You can be right about the direction and still lose 100% of your premium, simply because the move came too late, or was not strong enough. And SELLING naked options exposes you to potentially unlimited losses. Options are not a shortcut to wealth: they are a professional's tool.
The rule of prudence
If you cannot explain precisely, to someone else, what you lose in the worst case, do not take the position. For the vast majority of private investors, the only reasonable use of options is hedging, never leveraged speculation.
À retenir
- ✓Call = the right to buy; put = the right to sell (often used as insurance).
- ✓An option buyer's loss is capped at the premium; a naked seller's risk is potentially unlimited.
- ✓Time works against the buyer: you can be right about the direction and still lose everything.