2. What Are Stock Options?

Buying vs Selling Options

Buying an option means you are only risking your principal. If you purchase $500 worth of QQQ call options and hold through expiration while never reaching the strike price, you’re out your initial $500 and no more.

This goes for whether you’re buying calls or puts – you can only lose as much as you put in when buying options. 

Selling an option is different though.

An option writer collects a premium when they sell the contract to a buyer.

In the example above, the buyer is paying the writer a $500 premium for the rights provided by the option contract. If the contract expires worthless, the buyer is out $500 and the writer pockets the premium.

Most option contracts will eventually expire worthless, but option sellers do open themselves up to potentially unlimited downside risk.

If a writer sells a call option right before a melt up rally in stocks, they might lose far more than the premium they collected – theoretically, the potential losses are infinite.

Because of this increased risk, most brokers only allow inexperienced traders to buy calls and puts. Gaining access to option selling usually requires more significant investing experience. 

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