Options are a versatile but complex stock market instrument, used for hedging, income and speculation. Understanding the basics is useful general knowledge — though, like futures, they sit at the higher-risk end of investing.
What are options?
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price (the strike price) before or on an expiry date. Unlike shares, an option isn’t ownership in a company — it’s a contract tied to that asset’s price.
Calls and puts
A call option gives the right to buy at the strike price — used when an investor expects the price to rise. A put option gives the right to sell at the strike price — often used as a hedge against a price fall.
The key components
- Strike price — the price at which you can buy (call) or sell (put).
- Expiration date — after which the option expires; it can become worthless.
- Premium — the cost of buying the option, paid to the seller.
- Underlying asset — the share or security the option is based on.
The risks
Options can lose their entire premium, and many strategies are genuinely complex — easy to get wrong and capable of large losses. They’re not something to approach without thorough understanding, and for most people saving toward retirement through funds and ISAs, they’re simply not necessary.
This guide explains how options work as general information. It isn’t a recommendation to trade them — and given their risk and complexity, caution is the sensible default.