What do options cost

Buyers have the right — but aren't obligated — to buy or sell the security at a predetermined price strike price by a certain date expiry date. One options contract is generally based on shares of the underlying stock.

The value of an option is based on the stock's current market price and volatility of the stock. An option's intrinsic value its in-the-money value and the length of time time value until expiry are also reflected in its overall value. Similar to stocks, options trade on exchanges. However, while stocks can give you part ownership of a company, options don't.

Options don't come with voting rights, nor do they pay dividends like many stocks do. There are two styles of options contracts: American-style and European-style. American-style options are the most common and can be exercised anytime up to and including their expiration date. European-style options can only be exercised on their expiry date.

Options typically cost much less than the underlying asset, but still offer exposure to the price movements of that asset without owning it.

Options are flexible and can support a variety of profit and risk-minimization strategies. In the case of stocks, for instance, options can help you:. If the stock stays at the strike price or dips below it, the call option usually will not be exercised, and the call seller keeps the entire premium.

But on rare occasions, the call buyer still might decide to exercise the option, so the stock would have to be delivered.

This situation benefits the call seller, though, since the stock would be cheaper than the strike price being paid for it. Above that point, the call seller begins to lose money overall, and the potential losses are uncapped.

Potential losses theoretically are infinite if the stock price continued to rise, so call sellers could lose more money than they received from their initial position. Compare the best brokers for options trading. Call options are popular because they can allow investors to achieve different means. One lure for investors wanting to speculate is that they can magnify the effects of stock movements, as the table above indicates.

But options have many other uses, such as:. Limit risk-taking, while generating a capital gain. Options often are seen as risky, but they can also be used to limit risk or hedge a position.

Both strategies have a similar payoff, but the call limits potential losses. Generate income from the premium. Investors can sell call options to generate income, and this can be a reasonable approach when done in moderation, such as through a safe trading strategy like covered calls.

Especially in a flat or slightly down market, where the stock is not likely to be called, it can be an attractive prospect to generate incremental returns. Realize more attractive selling prices for their stocks. Some investors use call options to achieve better selling prices on their stocks.

James Royal. Written by. Bankrate senior reporter James F. Royal, Ph. Edited By Brian Beers. Edited by. Brian Beers. Brian Beers is the senior wealth editor at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Reviewed By Malik S. Reviewed by. Malik S. Share this page. Bankrate Logo Why you can trust Bankrate. Bankrate Logo Editorial Integrity.

Key Principles We value your trust. Bankrate Logo Insurance Disclosure. Read more From James. About our review board. You may also like Put options: Learn the basics of buying and selling. Short selling: How to short sell stocks. You could sell your options, which is called "closing your position," and take your profits—unless, of course, you think the stock price will continue to rise Say we let it ride. This is leverage in action. So far we've talked about options as the right to buy or sell the underlying.

This is true, but in actuality a majority of options are not actually exercised.