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Ways to trade and invest · Guide 11 of 11

What Are Options? Options Trading Explained for Beginners

Last reviewed 2 November 2026Advanced: uses leverage or contractsCovers the UK, US, EU, Australia and Canada

The short version

An option is a contract that gives its buyer the right, but not the obligation, to buy or sell something at a fixed price before a set date. The buyer pays the seller a fee for this right, called the premium. Buying options limits your loss to the premium, but most options bought by beginners expire worthless. Selling options earns you the premium but can expose you to losses far bigger than what you received.

You get
A contract giving the right to buy or sell at a set price
Typical costs
The premium, plus commissions and spreads
Can you lose more than you put in?
Not when buying; yes when selling (writing) options
Risk
High
  • A call option is the right to buy at a set price. It gains value when the price rises.
  • A put option is the right to sell at a set price. It gains value when the price falls.
  • The set price is the strike price. The date the option ends is the expiry.
  • Buyers can lose the whole premium, and options lose value as expiry gets closer.
  • Sellers collect the premium but take on an obligation. Selling a call without owning the shares can, in theory, lose an unlimited amount.

How options work

Options exist on shares, indices, currencies and commodities. On US exchanges, one standard share option contract covers 100 shares1. Option prices are quoted per share, so a premium of $2 means the contract costs $200.

An option has value for two reasons. Its intrinsic value is what you’d gain by using it right now, called exercising it2. For a call with a $55 strike when the share is at $60, that’s $5 per share. Its time value is the extra people will pay for the chance it becomes more valuable before expiry. Time value shrinks every day and reaches zero at expiry; traders call this time decay.

Selling a call on shares you already own is called a covered call, which is much less risky because you can hand over your own shares. Our covered call lesson explains it step by step.

What it costs

  • Premium: the price of the option itself.
  • Commission: often charged per contract, even by brokers that don’t charge for share trades.
  • Spread: options often have wider gaps between buy and sell prices than shares, especially on less-traded strikes and dates. It can be a large percentage of a cheap option’s price.
  • Exercise and assignment fees: some brokers charge when an option is exercised.

The risks

  • Buying: losing the whole premium. You need to be right about the direction, the size of the move and the timing. Being right about one or two isn’t enough.
  • Time decay. Options lose value as expiry approaches, so waiting costs you money.
  • Selling: open-ended losses. Selling calls you don’t own, or selling puts, can lose far more than the premium you received.
  • Complexity. Prices are affected by how volatile the market expects the share to be. That can fall after news even when the share price moves your way.
  • Cheap-looking “lottery tickets”. Options far from the current price cost little because they rarely pay off.

Rules where you live

Products, protections and tax rules differ from country to country. Here’s a summary for the main English-speaking markets. Always check your own regulator for the latest position.

US
Listed options are regulated by the SEC and FINRA. Brokers must give you the Options Disclosure Document (Characteristics and Risks of Standardized Options)1, and approve you for an options level: usually buying calls and puts or selling covered calls first, with selling uncovered options reserved for experienced, well-funded clients.
UK
Exchange-traded options are offered by some FCA-authorised brokers, mainly on US and European exchanges, after an appropriateness check. Options offered as CFDs or spread bets fall under the FCA’s CFD rules, including negative balance protection. Binary options are banned for retail clients.
EU
Listed options (for example on Eurex) are available through some brokers under MiFID rules. Binary options are banned for retail clients.
Australia
Exchange-traded options on shares and indices trade on the ASX. ASIC has banned binary options for retail clients and is reviewing CFDs over options that can lose more than the premium3.
Canada
Options trade on the Montréal Exchange and through CIRO-regulated dealers, which also approve clients for different option levels.

Who it tends to suit

Tends to suit

  • Experienced investors who already understand shares and want to hedge, or to earn income with covered calls.
  • Traders who understand time decay and volatility and limit themselves to buying options or fully covered strategies.

Think twice if

  • Beginners chasing cheap options for big wins.
  • Anyone selling uncovered options without the money to cover worst-case losses.
  • Anyone who doesn’t know what they’ll do at expiry before they trade.

How to get started safely

  1. Get comfortable investing in shares or ETFs first.
  2. Read your exchange’s or broker’s options risk document in full.
  3. Practise on paper or a demo account with simple trades: buying a call or put, or a covered call.
  4. Before each trade, write down the maximum loss, the break-even price and what you’ll do at expiry.
  5. Avoid selling uncovered options until you have long experience and enough money to cover the worst case.

Words in this guide

Option
A contract giving the buyer the right, but not the obligation, to buy or sell at a set price before a set date.
Call / put
A call is the right to buy; a put is the right to sell.
Strike price
The fixed price at which the option can be used.
Expiry
The date the option ends.
Premium
The price the buyer pays the seller for the option.
Exercise / assignment
Exercising is using the option; assignment is when a seller is required to fulfil it.
Intrinsic and time value
Intrinsic value is what the option is worth if used now; time value is the extra paid for what might happen before expiry.
Covered call
Selling a call option on shares you already own.
Binary option
A product paying a fixed amount or nothing. Banned for retail clients in the UK, EU and Australia.

Frequently asked questions

Can you lose more than you invest with options?

Not when you buy them: the most you can lose is the premium. When you sell options without owning the shares or holding the cash to cover them, losses can be far larger than the premium, and unlimited on a sold call.

Why do most options expire worthless?

Many options are bought with strike prices the share never reaches before expiry. Buyers need the right direction, a big enough move and good timing, and time decay works against them every day.

Are options good for beginners?

Generally not as a first step. Learn how shares and funds behave first. If you do try options, start with buying them or covered calls, where your risk is clear and limited.

Sources and further reading

Numbers in the guide, like 1, point to these sources. Rules, fees and tax change, so check the latest version before you act.

  1. Characteristics and Risks of Standardized Options (Options Disclosure Document) The Options Clearing Corporation.
  2. Exercising Options. The Options Industry Council.
  3. ASIC moves to extend and strengthen CFD consumer protections (26-239MR, 12 October 2026) Australian Securities and Investments Commission.

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