Options trading has exploded in popularity, giving retail investors access to sophisticated strategies previously reserved for institutions. An option is a contract that gives you the right, but not the obligation, to buy or sell an asset at a specific price by a specific date.

The Basics: Calls and Puts

A Call option gives you the right to buy the underlying stock, betting that the price will go up. A Put option gives you the right to sell, betting that the price will go down.

The Power of Leverage

Options allow you to control 100 shares of a stock for a fraction of the cost of buying the shares outright. This leverage can magnify your returns, but it can also magnify your losses. If the stock does not move in your favored direction by the expiration date, your option can expire worthless.

Hedging Your Portfolio

Beyond speculation, options are excellent tools for hedging. If you own a large stock portfolio, buying Put options can act as "insurance," protecting your wealth during sudden market crashes.