Options Trading
Definition
Buying or selling contracts that give the right (but not obligation) to buy (calls) or sell (puts) an underlying asset at a specified price before a specified date.
Options are derivative contracts that derive their value from an underlying asset (usually a stock). A call option gives you the right to buy the stock at a specific price (strike price) before a specific date (expiration). A put option gives you the right to sell at the strike price before expiration.
Buying options limits your risk to the premium paid. If you buy a $50 call for $2 per share and the stock stays below $50, you lose only the $2 premium. If the stock rises to $60, your option is worth at least $10, a 400% return on the $2 investment. This asymmetric payoff is what makes options appealing.
Selling options generates income through premiums but carries more risk. Selling a covered call (owning the stock while selling the call) generates income but caps your upside. Selling a naked put obligates you to buy the stock if it falls below the strike price, which can result in significant losses.
Key concepts in options include: intrinsic value (how much the option would be worth if exercised now), time value (the premium above intrinsic value based on time remaining), implied volatility (the market's expectation of future price movement), and the "Greeks" (delta, gamma, theta, vega) that measure how option prices change with various factors.
Options are taxed differently from stocks. Premium received from selling options, exercised options, and expired options each have specific tax treatments. Proper tracking of options activity is essential for accurate tax reporting, especially when options are assigned or exercised.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Are options riskier than stocks?
It depends on the strategy. Buying options limits risk to the premium paid (often less than buying stock). Selling naked options can be extremely risky. Options allow both more conservative (covered calls) and more aggressive (leveraged bets) approaches than stock alone.
What's the difference between a call and a put?
A call gives you the right to BUY at the strike price — you profit when the underlying goes up. A put gives you the right to SELL at the strike price — you profit when the underlying goes down. Calls are bullish bets; puts are bearish bets or portfolio hedges.