What is Options?

An option is a derivative contract that gives the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a fixed strike price on or before a specified expiry date, in exchange for an upfront premium paid to the seller.

Buying a call gives upside exposure to the underlying with capped loss equal to the premium. Buying a put gives downside protection or speculation, again with bounded loss. Selling options reverses the profile: the writer collects the premium but takes on (in some cases unlimited) risk. Premium = intrinsic value + time value, and decays as expiry approaches.

Common retail uses include covered calls (sell calls against stock you own to harvest premium income), protective puts (buy puts to insure a portfolio against a crash) and cash-secured puts (sell puts on stocks you'd happily buy cheaper). Each is a defined-risk strategy when properly sized.

Speculative call buying — popular on US apps during the 2020–21 retail boom — is extremely high-risk; the typical outcome is 90% of premium lost as the option expires worthless. Options are best understood as insurance contracts. Insurance is rarely a profitable buy from the customer's perspective, but it can be the rational hedge for risks you cannot otherwise afford.

Example

An investor owns 100 Nestlé shares at CHF 95 and sells one 6-month covered call at strike CHF 105 for a CHF 1.50 premium per share (CHF 150 total). If Nestlé closes below CHF 105, she keeps the premium (1.6% over 6 months). If it closes above CHF 105 she sells at CHF 105 + CHF 1.50 = effective CHF 106.50 — capped upside but better than current price.

Related terms

Derivatives

Derivatives are financial contracts whose value derives from an underlying asset (stock, bond, currency, commodity, index, rate), used for hedging, speculation and access to exposures that would be inefficient or impossible to obtain directly.

Short Selling

Short selling is a strategy that profits from a fall in a security's price by borrowing shares from a broker, selling them at the current price, and buying them back later at a lower price to return to the lender — the inverse of conventional 'going long'.

Stock (Share / Equity)

A stock is a unit of ownership in a publicly listed company that entitles the holder to a proportional claim on the firm's assets and future profits, traded on exchanges like SIX, Xetra, Euronext or NYSE.

Risk Tolerance

Risk tolerance is the level of investment loss an investor is psychologically and financially able to bear without abandoning the plan, used to determine the right mix of stocks, bonds and cash in a portfolio.

Frequently asked questions

What is an option premium?+

The price paid by the buyer to the seller for the right; equals intrinsic value plus time value, falling to intrinsic at expiry.

Calls vs puts?+

Calls = right to buy (bullish); puts = right to sell (bearish or hedging).

Can I lose more than I invest?+

As a buyer, no — max loss is the premium. As a seller of naked options, yes — losses can far exceed premium received.