Options Trading
A leveraged derivatives activity with path-dependent risks, contract-specific terms, and outcomes that cannot be reduced to simple bullish or bearish labels.
Options trading involves buying or selling contracts whose value and obligations depend on an underlying asset, strike price, expiration, exercise style, settlement terms, contract multiplier, volatility, rates, dividends, liquidity, and other contract features. Buyers and sellers face different but strategy-specific risks.
Frequently Asked Questions
Is the buyer maximum loss always limited to the premium?
For a fully paid long option held without offsetting positions, loss is generally limited to premium and transaction costs. Multi-leg portfolios, financing, taxes, exercise, assignment, and related underlying positions can create additional exposure.
Do option writers always face unlimited risk?
No. An uncovered short call can have theoretically unlimited loss as the underlying price rises, while a short put has large but finite downside if the underlying falls toward zero. Spreads, covered positions, cash collateral, margin rules, and settlement terms change the risk.
Does one option contract always control 100 shares?
No. One hundred shares is common for standard U.S. equity options, but adjusted contracts, index options, futures options, foreign markets, corporate actions, and nonstandard products can use different multipliers and settlement terms.
Are covered calls and cash-secured puts conservative?
They can limit some risks compared with uncovered writing, but they still expose the investor to equity losses, assignment, capped upside, tax, liquidity, and opportunity-cost risk. The label does not make a strategy suitable for every investor.