What is an option?

An option is a contract. You are not buying a piece of a company the way you do with a share. You are buying an agreement that gives you the right to trade that company’s stock at a price you pick, for a length of time you pick.

A contract, not a share

Own a share of NVDA and you own a sliver of the company. You can hold it forever. Own an NVDA option and you own an agreement about NVDA that expires on a set date. When that date passes, the contract is gone. That difference drives almost everything else about trading them.

One contract controls 100 shares

A single option contract covers 100 shares of the underlying stock. Prices are quoted per share, so a contract listed at 4.10 costs 410 dollars, not 4.10. This trips up nearly every beginner once. Whenever you see one of our alerts at a price, multiply by 100 to get what one contract actually costs.

That 100 share multiplier is also where the leverage comes from. Controlling 100 shares of a 200 dollar stock outright takes 20,000 dollars. A contract on those same 100 shares might cost a few hundred. The move you capture is on all 100 shares either way.

Two sides to every contract

Someone sells you the contract. That seller collects the money you pay and takes on the obligation to deliver if you use your right. You, the buyer, hold the right and are never obligated to do anything. If the trade does not work, you walk away and lose what you paid.

Selling options is a different discipline with a different risk profile, and it is not what these lessons cover. Everything here is written from the buyer’s side, which is how the contracts you see in our alerts are traded.

Why traders use them

• Leverage. A small amount of money moves with 100 shares, so a modest move in the stock can be a large move in the contract.
• Defined risk. As a buyer, the most you can lose is what you paid. There is no margin call and no position that keeps bleeding past your cost.
• Direction either way. One kind of contract profits when a stock rises and another when it falls, so you are not stuck waiting for green days.

And the catch

Leverage runs in both directions, and the clock only runs one way. An option can lose most of its value in a session, and it can go to zero on the expiration date even if you were right about the company. Being right about direction is not enough. You have to be right about direction, size, and timing at once, which is why the rest of this material exists.

Options trading involves substantial risk of loss and is not suitable for every investor. Nothing here is financial advice or a recommendation to buy or sell any security.