Options Basics: Calls, Puts and the Risks

An option is a contract that gives its buyer the right, but not the obligation, to buy or sell a stock at a set price before a set date. Options can limit risk or multiply it, depending on how they're used, and many trading tools are built around them. This guide explains calls and puts, the key terms, how buyers and sellers can lose money, and the rules that apply before you trade.

This is general education, not financial advice. Options involve real risk, including losing more than you expect.

Calls and puts#

There are two kinds of options:

• A call gives the buyer the right to buy the underlying stock at the strike price.
• A put gives the buyer the right to sell it at the strike price.

The buyer pays the seller (also called the writer) a premium for that right. The premium is the price of the option, not a deposit, and you don't get it back. Most US stock option contracts cover 100 shares, so a premium quoted at $2.00 costs $200 per contract.

The key terms#

• Strike price: the price at which the option lets you buy or sell.
• Expiration: the date the option ends. An option that isn't exercised by then expires worthless.
• In the money: a call whose strike is below the stock price, or a put whose strike is above it.
• At the money: the strike equals the stock price.
• Out of the money: the opposite of in the money. These options have no value at expiration.
• Exercise: using the right to buy or sell. Assignment is when the seller is required to deliver. Most US stock options are American-style, so they can be exercised before expiration, and sellers can be assigned on any trading day.

A simple example#

Say a stock trades at $50, and you buy one call with a $55 strike, expiring in a month, for a premium of $2.00 ($200 total).

• If the stock is at $60 at expiration, the call is worth about $5.00 per share ($500). After the $200 you paid, you're up about $300.
• If the stock is at $57, the call is worth about $2.00, so you've roughly broken even.
• If the stock stays below $55, the call expires worthless and you lose the full $200.

Your break-even is the strike plus the premium: $57 in this example. The stock has to rise past that before expiration for the trade to come out ahead.

How much you can lose#

The risk depends on which side you're on:

• Buying a call or put: you can lose the whole premium, but no more.
• Selling an uncovered (naked) call: the stock can rise without limit, so your potential loss is theoretically unlimited.
• Selling an uncovered put: you can lose up to the strike price per share, minus the premium you collected, if the stock falls to zero.
• Covered strategies, such as selling a call against shares you own, change the risk but don't remove it.

What moves an option's price#

• The stock price. Calls usually gain as the stock rises; puts as it falls.
• Time decay. Options lose value as expiration approaches, and the loss speeds up near the end. That works against buyers and for sellers.
• Implied volatility, the market's expectation of how much the stock will move. Higher implied volatility generally means higher premiums. It often drops after big events like earnings, which can shrink an option's value even when the stock moves your way.

0DTE options#

Zero-days-to-expiration (0DTE) options expire the same day they're traded. They're cheap because there's almost no time left, but FINRA warns that their prices react sharply to small moves: buyers can lose the whole premium quickly, uncovered sellers face potentially unlimited losses, and brokers may close positions before the market closes.

Rules before you trade#

Account approval#

Your broker has to give you the options disclosure document, Characteristics and Risks of Standardized Options, and approve your account for options before you trade. Brokers approve accounts in levels: lower levels allow simpler strategies, such as covered calls or buying options, and higher levels allow selling uncovered options. Read the disclosure document; it's long, but it's the official explanation of the risks.

The day trading rule changed in 2026#

For years, the pattern day trader rule applied to anyone making four or more day trades in five business days in a margin account, and required at least $25,000 in that account. That rule has been replaced. The SEC approved FINRA's new intraday margin requirements in April 2026, effective June 4, 2026:

• brokers now check during the trading day that your equity covers your positions;
• the $25,000 minimum and the day-trade count go away;
• the $2,000 minimum to trade on margin stays, and brokers can set stricter house rules.

Brokers can phase the change in until October 20, 2027, so yours may still apply the old rule. Check its current policy.

Tools and alerts#

Many trading tools focus on options: flow feeds, scanners and indicators with options alerts. Our guide to options flow and scanners explains what that data does and doesn't show, and our guide to trading indicators and algos covers chart-based tools.

Options are also a favorite of scammers, who promise doubled accounts or "guaranteed" plays. Our guide to spotting trading scams covers the warning signs.

Options have their own tax rules, which our guide to trading taxes covers.

Trading tools on OOSClub#

The stocks and options niche lists trading software with what each tool says it does, the markets it covers and its plans. We never publish a tool's results, and nothing on OOSClub is financial advice.