{"id":511437,"date":"2022-10-30T13:47:39","date_gmt":"2022-10-30T11:47:39","guid":{"rendered":"https:\/\/www.etoro.com\/?page_id=511437"},"modified":"2025-11-03T15:29:15","modified_gmt":"2025-11-03T13:29:15","slug":"what-are-options","status":"publish","type":"page","link":"https:\/\/www.etoro.com\/en-us\/options\/what-are-options\/","title":{"rendered":"A Guide to Options"},"content":{"rendered":"\n<p class=\"is-style-summary\">Ready to learn about options? In this article, we\u2019ll walk you through some of the basic terminology and strategies surrounding options.<\/p>\n\n\n\n\n\n\n<hr class=\"wp-block-separator wp-block-separator-color-dark-grey wp-block-separator-spaces-medium wp-block-separator-weight-1\"\/>\n\n\n\n<p>Options offer ways for traders to develop more sophisticated trading strategies. The first part of incorporating them into your decision-making involves understanding what options are and what they can do.&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"756\" height=\"400\" src=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-1-How-to-understand-options.png\" alt=\"\" class=\"wp-image-1010976 wp-image-desktop\" srcset=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-1-How-to-understand-options.png 756w, https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-1-How-to-understand-options-300x159.png 300w\" sizes=\"(max-width: 756px) 100vw, 756px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">How to understand options<\/h2>\n\n\n\n<p>Ever go to book a plane ticket, but you\u2019re not 100% sure you\u2019re going to be able to take that trip? Prices look good, and you don\u2019t want to risk them going up, but you\u2019re not quite ready to put $500 down to reserve your seat, yet.<\/p>\n\n\n\n<p>Some airlines will offer you something called a \u201cflight hold,\u201d which <strong>reserves your right to purchase your ticket at the current price, no matter how much the price increases in the future. <\/strong>Some of these holds last up to two weeks, and they cost a fraction of the price of a ticket.<\/p>\n\n\n\n<div class=\"wp-block-etoro-tip wp-block-etoro-tip-border-yellow\"><span class=\"wp-block-etoro-tip-icon\"><\/span><div class=\"wp-block-etoro-tip-text\">\n<p><strong>Tip: <\/strong>Flight holds and options involve spending a small amount of money now to lock in a future purchase price.<\/p>\n<\/div><\/div>\n\n\n\n<p><mark>Buying an option on a <a href=\"https:\/\/www.etoro.com\/discover\/markets\/stocks\">stock<\/a> gives you the right, but not the obligation, to buy or sell a stock (usually 100 shares at a time) at a particular price \u2014 even if that price changes for the general public.<\/mark><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Options terminology<\/h2>\n\n\n\n<p>Like any corner of the market, <strong>options come with their own set of vocabulary<\/strong>. To get a sense of what everyone\u2019s talking about when engaging with options, the following terms are a good place to start:<\/p>\n\n\n\n<ul class=\"wp-block-list wp-block-list wp-block-list-circle\">\n<li><strong>Call:<\/strong> An option which gives you the right to <strong>buy <\/strong>an asset at the strike price. You&#8217;d buy a call option if you believe the asset&#8217;s price will go up.<\/li>\n\n\n\n<li><strong>Put:<\/strong> An option which gives you the right to <strong>sell <\/strong>an asset at the strike price. You&#8217;d buy a <a href=\"https:\/\/www.etoro.com\/en-us\/options\/what-are-puts-and-calls\/\">put option<\/a> if you believe the asset&#8217;s price will go down.<\/li>\n\n\n\n<li><strong><e-tip data-tooltip=\"Traders pay brokers a spread (a fee) added to their buying and selling prices.\">Spread<\/e-tip><\/strong>: A combination of two or more options for the same stock. This can be a combination of calls, puts, or both.<\/li>\n\n\n\n<li><strong>Strike price:<\/strong> The predetermined price at which you can buy or sell the asset.&nbsp;<\/li>\n\n\n\n<li><strong>Exercise:<\/strong> The process of turning an option into shares or using the right to sell shares at the strike price.<\/li>\n\n\n\n<li><strong>Premium:<\/strong> The price you pay for the option contract.&nbsp;<\/li>\n\n\n\n<li><strong>Expiry date:<\/strong> The date at which the option expires.&nbsp;<\/li>\n\n\n\n<li><strong>Intrinsic value:<\/strong> The difference between the current market price and the strike price if an option is in-the-money.<\/li>\n\n\n\n<li><strong>Time Value:<\/strong> The additional value of an option based on the time remaining until expiry.<\/li>\n\n\n\n<li><strong>Out-of-the-money:<\/strong> An option with a strike price that <strong>has not<\/strong> been surpassed by the current stock price.<\/li>\n\n\n\n<li><strong>In-the-money:<\/strong> An option with a strike price that <strong>has<\/strong> been surpassed by the current stock price.<\/li>\n\n\n\n<li><strong><a href=\"https:\/\/www.etoro.com\/en-us\/options\/greeks-explained\/\">The Greeks<\/a>:<\/strong> The measurements of change which are used to help determine the market price of an option.<\/li>\n<\/ul>\n\n\n\n<div class=\"wp-block-etoro-tip wp-block-etoro-tip-border-yellow\"><span class=\"wp-block-etoro-tip-icon\"><\/span><div class=\"wp-block-etoro-tip-text\">\n<p><strong>Tip:<\/strong> An option which is out-of-the-money will have an intrinsic value of zero.<\/p>\n<\/div><\/div>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"756\" height=\"400\" src=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-2-How-do-options-work.png\" alt=\"\" class=\"wp-image-1011166 wp-image-desktop\" srcset=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-2-How-do-options-work.png 756w, https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-2-How-do-options-work-300x159.png 300w\" sizes=\"(max-width: 756px) 100vw, 756px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">How do options work?<\/h2>\n\n\n\n<p>So, how does one actually make \u2014 or lose \u2014 money, using options?<\/p>\n\n\n\n<p>The first way is through <strong>calls<\/strong>.&nbsp;<\/p>\n\n\n\n<p>A call is <strong>the right to buy shares at a particular price<\/strong>. When you purchase a call, you are expecting the price of the shares to go <strong>up<\/strong>. For example, you might buy a call with a $100 premium that reserves your right to buy shares at $10. If the price then goes up to $15, you\u2019d make about $5 on each of your 100 shares \u2014 $500 \u2014 minus the original cost of the option \u2014 the $100 premium \u2014 leaving investors with a $400 profit.<\/p>\n\n\n\n<p>Another way investors use options is to trade volatility. Purchasing options when implied volatility is low can result in a profit if an event takes place that causes volatility to increase \u2014 for example, if a major <a href=\"https:\/\/www.etoro.com\/en-us\/investing\/what-is-macroeconomics\/\">geopolitical shock<\/a> takes place. If news events cause volatility levels to increase, and the strike price of an option becomes more likely to be reached, then the option becomes more valuable. If a trader doesn\u2019t want to hold the option until its expiry, they can sell it in the market at the new higher price and bank a profit.<\/p>\n\n\n\n<p>You can also <a href=\"https:\/\/www.etoro.com\/en-us\/options\/how-to-trade-options\/\">trade options<\/a> to capture an expected price move in an underlying asset. This will determine what kind of option you decide to purchase and, in turn, how you make (or lose) money.<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1080\" height=\"1080\" src=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2022\/10\/101-gif.gif\" alt=\"\" class=\"wp-image-511462 wp-image-desktop\"\/><\/figure>\n\n\n\n<p>The second way is through <strong>puts<\/strong>, which <strong>reserve your right to sell shares at a particular price.<\/strong> Let\u2019s go back to our previous example. If you reserve the right to sell your 100 shares at $10, and the price goes down to $5, you could sell at the higher price \u2014 the strike price \u2014 buy back at the lower price \u2014 the current market price \u2014 and again make $5 per share. That gross profit of $500 needs to factor in the original cost of the option ($100) which leaves a net profit of $400.<\/p>\n\n\n\n<figure class=\"wp-block-image aligncenter\"><img loading=\"lazy\" decoding=\"async\" width=\"1080\" height=\"1080\" src=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2022\/10\/101-gif-b.gif\" alt=\"\" class=\"wp-image-511486 wp-image-desktop\"\/><\/figure>\n\n\n\n<p>The last way to trade options that we\u2019ll address is called a <strong>spread<\/strong>, and it involves <strong>investing in two or more options at once<\/strong>. There are many types of spreads, almost all of them with funny names (verticals, butterflies, condors, straddles, strangles, rolls, and more). Typically, you\u2019ll trade two options in a spread, which can help protect against risk, or change the likelihood of profit given various price movements. For instance, a vertical spread involves simultaneously buying one option and selling another. This can be done with several objectives in mind, such as trying to capture a profit or protecting your portfolio against risk.<\/p>\n\n\n\n<div class=\"wp-block-etoro-tip wp-block-etoro-tip-border-yellow\"><span class=\"wp-block-etoro-tip-icon\"><\/span><div class=\"wp-block-etoro-tip-text\">\n<p><strong>Tip:<\/strong> The \u201ctime element,\u201d the fact that options expire, is a crucial factor to consider when trading options.<\/p>\n<\/div><\/div>\n\n\n\n<p>In most cases, your losses will be limited to the premium you pay for the option \u2014 although there are some cases where you may be exposed to greater loss than your initial investment. Although these instances are rare, they can occur.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What are naked options?<\/h2>\n\n\n\n<p>A deeper analysis of how the options market works brings in additional elements, such as the concept of \u201cnaked\u201d options. This term describes instances where more experienced traders and institutional firms (such as brokers) act as a <e-tip data-tooltip=\"An individual or firm that continually provides bid-ask spreads in a market keeping those markets liquid.\">market maker<\/e-tip> and sell options to other traders, but don\u2019t own the underlying stock.<\/p>\n\n\n\n<p>Taking a step back and considering the opposite of naked options \u2014 \u201ccovered options\u201d \u2014 can help to explain.&nbsp;<\/p>\n\n\n\n<p>For example, say Trader A owns 100 shares of <a href=\"https:\/\/www.etoro.com\/markets\/nvda\">NVIDIA Corp<\/a> and sells one call contract against their shares. The call is \u201ccovered\u201d because Trader A has the stock on hand to deliver in the event that the option is exercised and shares get \u201ccalled\u201d away. Remember, since Trader A sold the call option rather than bought it, they have the <em>obligation<\/em> to deliver the appropriate amount of stock at the agreed price (the strike price), provided the buyer of the call option \u2014 let\u2019s call them Trader B \u2014 chooses to exercise it (which is the <em>buyer\u2019s<\/em> right<em>, <\/em>not the <em>seller\u2019s<\/em>).&nbsp;<\/p>\n\n\n\n<p>Trader A would have a naked call position if they had sold the call, but did <em>not<\/em> own the necessary shares of the underlying security \u2014 in this case, 100 shares of NVDA. This is considered a dangerous options position, because theoretically, there is no limit to how high stock prices can go. If Trader A has sold the call naked \u2014 meaning the position is \u201cuncovered\u201d \u2014 then, they could lose a great deal of money if the stock goes on a strong rally.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"756\" height=\"400\" src=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-3-How-to-use-options-as-a-hedge.png\" alt=\"\" class=\"wp-image-1011214 wp-image-desktop\" srcset=\"https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-3-How-to-use-options-as-a-hedge.png 756w, https:\/\/www.etoro.com\/wp-content\/uploads\/2025\/02\/Body-Image-3-How-to-use-options-as-a-hedge-300x159.png 300w\" sizes=\"(max-width: 756px) 100vw, 756px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">How to use options as a hedge<\/h2>\n\n\n\n<p>There are many ways that you can use options to enhance or protect your portfolio. One of the more conservative ways is to use options as a <e-tip data-tooltip=\"A risk management technique which involves putting on defensive trades to protect your overall returns.\">hedge<\/e-tip>.<\/p>\n\n\n\n<div class=\"wp-block-etoro-tip wp-block-etoro-tip-border-yellow\"><span class=\"wp-block-etoro-tip-icon\"><\/span><div class=\"wp-block-etoro-tip-text\">\n<p><strong>Tip:<\/strong> Despite their reputation as a high-risk\/high-reward investment, options can actually help to limit your risk.<\/p>\n<\/div><\/div>\n\n\n\n<p>For example, say you bought 100 shares of a stock. You think it\u2019s going to go up (which is why you bought the shares in the first place), but you\u2019re just not sure. You could hedge that position by buying a put, which covers the same amount of shares. If the strike is a long way from the current trading price, then you can expect to pay a smaller premium to secure the \u201cinsurance\u201d offered by those options. Conversely, if the strike price is close to the current trading price, this \u201cinsurance premium\u201d will cost more \u2014 but it will also offer more protection.&nbsp;<\/p>\n\n\n\n<p>That way, if the price of the stock \u2014 and, therefore, your entire stock investment \u2014 does drop, potential profits in the put can help offset some or possibly most of the losses in the stock investment. In the end, you might still lose a little, but it won\u2019t be as much as you would have lost with just the stock investment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Why trade options?<\/h2>\n\n\n\n<p>Hedging is only one of several reasons to trade options. Another is that they offer a way to incorporate <a href=\"https:\/\/www.etoro.com\/en-us\/trading\/leverage-margin\/\">leverage<\/a> into your strategies. This is because the initial outlay \u2014 the premium \u2014 is small in terms of the potential overall exposure gained should your options come into the money. And while options do have the potential to be high-risk, deploying the proper options strategy for an investor\u2019s specific goal can help to maximize the risk-reward opportunity. Which demonstrates how option strategies can suit a wide variety of different market conditions and risk tolerances.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Final thoughts<\/h2>\n\n\n\n<p>If you consider yourself a speculative trader or you like being a little more hands-on with your portfolio, <strong>options <\/strong>can potentially enhance or protect<strong> your investment strategy<\/strong>. Options trading involves risks, including the potential loss of your entire investment. It&#8217;s crucial to understand the mechanics of options and the factors that affect their value before trading.<\/p>\n\n\n\n<p>Learn more about the different ways to trade options by visiting the <a href=\"https:\/\/www.etoro.com\/en-us\/academy\/\">eToro Academy<\/a>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Quiz<\/h2>\n\n\n\n<div class=\"wp-block-etoro-quizzes\">\n<div class=\"wp-block-etoro-quiz\" data-answer=\"2\"><div class=\"wp-block-etoro-quiz-body\"><div class=\"wp-block-etoro-quiz-question\">How many Tesla Motors Inc. (TSLA) shares do you have the right to sell when you purchase one put option at eToro?<\/div>\n<div class=\"wp-block-etoro-quiz-item\">1<\/div>\n\n\n\n<div class=\"wp-block-etoro-quiz-item\">10<\/div>\n\n\n\n<div class=\"wp-block-etoro-quiz-item\">100<\/div>\n<\/div><div class=\"wp-block-etoro-quiz-result\">\u00a0<\/div><\/div>\n<\/div>\n\n\n\n<div class=\"wp-block-etoro-quizzes\">\n<div class=\"wp-block-etoro-quiz\" data-answer=\"0\"><div class=\"wp-block-etoro-quiz-body\"><div class=\"wp-block-etoro-quiz-question\">Which term best describes a situation where the strike price of a call option you hold is lower than the market price of the underlying asset?<\/div>\n<div class=\"wp-block-etoro-quiz-item\">In the money<\/div>\n\n\n\n<div class=\"wp-block-etoro-quiz-item\">Out of the money<\/div>\n\n\n\n<div class=\"wp-block-etoro-quiz-item\">High gamma<\/div>\n<\/div><div class=\"wp-block-etoro-quiz-result\">\u00a0<\/div><\/div>\n<\/div>\n\n\n\n\n\n<h2 class=\"wp-block-heading\">FAQs<\/h2>\n\n\n\n<dl class=\"wp-block-etoro-faq\">\n<div class=\"wp-block-etoro-faq-item\"><dt class=\"wp-block-etoro-faq-item-question\">Can you lose more than your initial premium?<\/dt><dd class=\"wp-block-etoro-faq-item-answer\">\n<p>If you are buying put or call options, then, most of the time, the most you can lose on an unsuccessful trade is the initial premium. That is, when your options expire worthless and out-of-the-money. But it is important that you check all of the <a href=\"https:\/\/www.etoro.com\/customer-service\/terms-conditions\/\">T&amp;Cs<\/a> of your options trades to ensure that this is the case.<\/p>\n<\/dd><\/div>\n\n\n\n<div class=\"wp-block-etoro-faq-item\"><dt class=\"wp-block-etoro-faq-item-question\">Are options regulated?<\/dt><dd class=\"wp-block-etoro-faq-item-answer\">\n<p>Some options markets are regulated and some are not. Options which are listed on a regulated exchange fall into the first bracket, but it is also possible to trade OTC (over-the-counter) options, which are private agreements between two individuals and which are not regulated.<\/p>\n<\/dd><\/div>\n\n\n\n<div class=\"wp-block-etoro-faq-item\"><dt class=\"wp-block-etoro-faq-item-question\">What do I need to consider when starting to trade options?<\/dt><dd class=\"wp-block-etoro-faq-item-answer\">\n<p>It is important to understand the mechanics of options before you start trading them and when booking your first trades prioritizing <a href=\"https:\/\/www.etoro.com\/en-us\/investing\/risk-management\/\">risk management<\/a> over potential gains. One tip is to start with small investments and gradually increase your exposure as you gain experience. It could also be worth seeking guidance from an independent financial professional.<\/p>\n<\/dd><\/div>\n<\/dl>\n\n\n\n\t\t<style>\n\t\t\t.rtl .etoro-block-shortcode-disclaimer {\n\t\t\t\ttext-align:right;\n\t\t\t}\n\t\t\t.etoro-block-shortcode-disclaimer {\n\t\t\t\tmargin-bottom:18px;\n\t\t\t\ttext-align:left;\n\t\t\t}\n\t\t\t.etoro-block-shortcode-disclaimer p{\n\t\t\t\tfont-size: 12px;\n\t\t\t\tline-height: 18px;\n\t\t\t}\n\t\t\t@media (min-width: 768px) {\n\t\t\t\t.etoro-block-shortcode-disclaimer {\n\t\t\t\t\tmax-width:1176px;\n\t\t\t\t\ttext-align:center;\n\t\t\t\t}\n\t\t\t\t.etoro-block-shortcode-disclaimer p {\n\t\t\t\t\tfont-size: 14px;\n\t\t\t\t\tline-height: 20px;\n\t\t\t\t}\n\t\t\t}\n\t\t<\/style>\n\t\t<div class='etoro-block-shortcode-disclaimer'><p>This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.<\/p>\n<p>This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. <strong>Not all of the financial instruments and services referred to are offered by eToro<\/strong> and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.<\/p>\n<p>eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Ready to learn about options? In this article, we\u2019ll walk you through some of the basic terminology and strategies surrounding options. Options offer ways for traders to develop more sophisticated trading strategies. The first part of incorporating them into your decision-making involves understanding what options are and what they can do.&nbsp;&nbsp;&nbsp; How to understand options&hellip;<\/p>\n","protected":false},"author":95,"featured_media":1050023,"parent":508672,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":true,"inline_featured_image":false,"sticky_cta_settings":"","footnotes":""},"asset_type":[],"class_list":["post-511437","page","type-page","status-publish","has-post-thumbnail","hentry"],"acf":[],"yoast_head":"<title>What are options? The complete guide to options trading<\/title>\n<meta name=\"description\" content=\"Options are contracts that give investors the option to buy or sell a security at a specific price. Learn everything you need to know about options on eToro.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.etoro.com\/en-us\/wp-json\/wp\/v2\/pages\/511437\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What are options? The complete guide to options trading\" \/>\n<meta property=\"og:description\" content=\"Options are contracts that give investors the option to buy or sell a security at a specific price. 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