Option
The right, but not the obligation, to buy or sell at a set price.
A call gives you the right to buy at a fixed price; a put gives you the right to sell. You pay a premium for that right. If the option expires worthless, the premium is gone, and that is your maximum loss as a buyer.
Selling (writing) options is the mirror image, and far more dangerous: you collect the premium up front, and take on an obligation whose losses can be many multiples of it.
Options decay. Time works relentlessly against the buyer, which is why being right about the direction and wrong about the timing still loses money.
The fee you never see
You buy at the ask and sell at the bid, so you are down the spread the instant you trade. In an illiquid stock it dwarfs any commission you thought you were avoiding.
Options are how sophisticated investors express precise views and hedge specific risks.
Buying cheap out-of-the-money calls as a lottery ticket. Most expire worthless, and the cheapness is the market pricing that fact.
Related terms
See Option on a real company
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