Options trading basics: calls, puts, premiums and who carries the risk

An option splits one trade into a right and an obligation. The buyer pays a premium for the right to buy or sell shares at a fixed price; the seller takes the premium and the duty to deliver or buy those shares if asked. That split decides who carries which risk. Options are also leveraged and they expire, so a buyer can be right about a stock's direction and still lose everything if the move comes too late. This guide covers calls and puts, what sets the premium, how buyers' and sellers' risks differ, how exercise and assignment work and what your firm requires first, with payoff tables for a long call, a long put and a covered call. Options are a higher-risk product, and the risks lead every section. The stocks hub covers the basics underneath.

What are calls and puts?

A call gives its buyer the right to buy 100 shares at a fixed price, the strike, until the option expires; a put gives the right to sell them. The seller, also called the writer, takes the other side: a call writer must sell the shares if assigned, and a put writer must buy them. The premium is paid up front, is not refundable and is quoted per share, so Investor.gov's example premium of $2.20 costs $220 a contract before commissions and fees.

You open a position with an opening purchase or an opening sale and leave it by doing the reverse, so a holder closes by selling and a writer by buying back. Besides monthly contracts, FINRA lists weekly options, long-dated contracts that run up to two years and eight months, and daily options, currently offered only on indexes. Before choosing a strike, check where the stock trades now on our stock pages.

What determines an option's premium?

A premium is intrinsic value, the amount by which the option is in the money, plus time value, the price of the chance of a bigger move before expiration. Time value shrinks to zero by the expiration date.

Investor.gov lists three main drivers: where the stock trades relative to the strike, how long the option has left, and how volatile the stock is. Interest rates matter too, mostly for longer-dated contracts. The illustrative prices below are for a $100 stock with 60 days to expiration and volatility of about 30% a year.

Two things stand out. Out-of-the-money options are all time value, so they are cheap in dollars but need a move just to be worth anything at expiration. And time value is largest at the money, where the outcome is least certain. FINRA describes the loss of time value as time decay, which speeds up as expiration approaches: an option holder pays for time, and the seller collects it.

How do the risks of buying and selling options differ?

Buying an option risks the premium; selling one collects the premium and takes on an obligation that can cost far more. The table uses the illustrative prices above, per contract.

The Options Disclosure Document is blunt about the seller's side. The writer of an uncovered call is in an extremely risky position, and the potential loss is unlimited; the risk of writing puts is substantial. It also shows that an uncovered option writer can face more risk than a short seller: in its example, shorting 100 shares for $5,000 loses $1,200 when the stock rises from $50 to $62, while writing 10 uncovered 50 calls for the same $5,000 loses $7,000. Short selling explained covers the short side.

Selling uncovered options also needs margin, and the requirement rises as the trade goes wrong. FINRA Rule 4210's minimum for an uncovered stock option is the option's current value plus 20% of the stock's value, less any amount the option is out of the money, and never less than the option's value plus 10% of the stock's value, or 10% of the strike for a put. For the 95 put above, that is $240 + $2,000 − $500 = $1,740. If the stock fell to $85 and the put traded at $10.50, the requirement would climb to $1,050 + $1,700 = $2,750. Firms can set higher house requirements, and margin accounts explained covers what happens when you cannot meet a call. A put writer who holds cash equal to the full purchase obligation, $9,500 here, avoids the margin loan but not the loss.

What do payoff tables show for a long call, a long put and a covered call?

A payoff table shows the result at expiration across a range of stock prices; before expiration, an option still has time value, so its price will differ from these figures.

The covered call is not a way to make shares safer. It swaps the upside above the strike for a small, fixed payment, and the shares can be called away early; FINRA notes that the risk of assignment rises the day before an ex-dividend date, and dividend dates explained covers that calendar.

How do exercise and assignment work?

Exercise is the holder using the right; assignment is the notice that tells a writer to deliver or buy the shares. US equity options are American style, so a holder can exercise on any business day before expiration, and a writer can be assigned at any time.

• Who gets assigned. The Options Clearing Corporation assigns exercises to clearing firms, and each firm allocates them to customers by random selection or first in, first out. Your firm must tell you which method it uses.
• Late notice. An assigned writer may not hear about it until a day or more later, and from the moment of assignment, even before the notice arrives, can no longer close the position by buying the option back.
• Settlement. Since May 28, 2024, an exercised stock option settles on the first business day after exercise, with the shares and cash changing hands as in a regular trade.
• Expiration. OCC exercises expiring equity options in the money by $0.01 or more unless the clearing firm instructs otherwise, and your firm may use a different threshold. Holders have until 5:30 p.m. Eastern time on expiration day to give final instructions, and firms can set an earlier cut-off.
• Cash to exercise. Exercising one call with a $100 strike takes $10,000, FINRA points out, so an in-the-money call left to expire can become a share purchase you must fund.
• Pin risk. When a stock closes at or very near the strike on expiration day, neither side knows for certain whether the option will be exercised, and the shares can move before the next open.

What do you need before your first options trade?

Your firm must deliver the Options Disclosure Document and approve your account for options in writing before it accepts your first options order, under FINRA Rule 2360.

1. Read the Options Disclosure Document

   The OCC's Characteristics and Risks of Standardized Options is the required disclosure, and the June 2024 edition, effective June 3, 2024, is the current version on OCC's site. Chapter X sets out the principal risks of each position.

2. Complete the options agreement

   Investor.gov says the agreement asks about your investment objectives, trading experience, income, liquid and total net worth, and the types of options you want to trade. The firm must use due diligence to learn the essential facts about you.

3. Receive an approval level

   A qualified supervisor, such as a registered options principal, approves or rejects the account in writing. Firms generally offer five levels, from lowest to highest risk, but the number of levels and what each allows vary by firm.

4. Add margin only if a strategy needs it

   Writing uncovered options needs a margin account with at least $2,000 of equity, and Rule 2360 requires firms that allow it to set their own minimum net equity for those accounts. FINRA's new intraday margin standard, which firms are phasing in, also counts options bought or sold on their expiration day.

Rule 2360 has firms record the types of transactions each account is approved for, such as buying, covered writing, uncovered writing and spreads, and FINRA reminded firms of these duties in Regulatory Notice 21-15. Customers approved for uncovered writing must also receive a special written statement on its risks. Approval for one type does not mean approval for the others, and how to choose a brokerage account covers how these permissions sit on top of an account.

What are the risks of trading options?

The central risks are losing the whole premium as an option decays and, for sellers, losses far larger than the premium collected. Use is growing fast: OCC cleared about 1.49 billion options contracts in September 2026, and average daily options volume for 2026 through September was 70.6 million contracts, 20.6% above the same period of 2025.

• A wasting asset. An option holder can lose the entire premium in a short time and must be right about both the direction and the timing of a move, the disclosure document warns.
• Leverage cuts both ways. In the document's own example, $5,000 spent on 10 calls is wiped out if the stock is unchanged at expiration, and loses 20% even when the stock rises 8%.
• Unlimited or very large losses for sellers. Uncovered calls have no loss limit, and a written put keeps losing all the way down to a stock price of zero.
• Assignment at any time. Early assignment can leave you with a stock position, or without shares you meant to keep, especially around ex-dividend dates and other corporate events.
• Margin calls. Requirements on written options climb as the stock moves against you, and the firm can close positions without notice if you do not meet them.
• Halts and exercise restrictions. Trading in an option may stop when its underlying stock is halted, and if exercise is restricted at the same time, holders are locked into their positions.
• Complexity. Multi-leg strategies limit losses only while every leg stays in place, and FINRA notes that a firm may close one leg, for example when funds are short to meet an assignment.
• Failure of the firm. If your broker fails, open listed options are closed out unless they can be moved promptly to another firm, as SIPC coverage explained describes.