Stock options — what they are and how they work
What are stock options? Call and put options, option premium, option strategies — accessible explanation for beginners.
What is an option?
An option is a derivative instrument that gives the buyer the right (but not obligation) to buy or sell an underlying asset at a fixed price within a specified time.
For this right, the buyer pays an option premium — the price of the option.
Types of options
Call option
Gives the right to buy an asset at a fixed price (strike price). You buy a call when you expect price to rise.
Example: You buy a call option on company X shares with strike price 100 PLN for a premium of 5 PLN. If the price rises to 120 PLN — you earn 15 PLN (120 − 100 − 5). If it falls — you only lose the premium (5 PLN).
Put option
Gives the right to sell an asset at a fixed price. You buy a put when you expect a decline or want to hedge your portfolio.
Key concepts
- Strike price — the price at which you can buy/sell the asset
- Premium — the price you pay for the option
- Expiration date — the date until which the option is valid
- In the money (ITM) — option has intrinsic value (profitable to exercise)
- Out of the money (OTM) — option has no intrinsic value
- At the money (ATM) — asset price ≈ strike price
Profit and loss profile
| Position | Maximum profit | Maximum loss |
|---|---|---|
| Buy call | Unlimited | Premium |
| Buy put | Strike − premium | Premium |
| Sell call | Premium | Unlimited |
| Sell put | Premium | Strike − premium |
Conclusion: option buyers risk only the premium. Option sellers take on potentially unlimited risk.
What are options used for?
- Speculation — profiting from price movements with limited risk (buying options)
- Hedging — protecting stock portfolio with put options
- Income generation — selling call options on owned stocks (covered call)
- Complex strategies — spread, straddle, strangle — combinations of options with different parameters
Options on WSE
Options on the WIG20 index are available on WSE. The market is smaller and less liquid than on American exchanges, but enables basic option strategies.
Options vs futures
Key difference: option gives a right, futures gives an obligation. Option buyer cannot lose more than the premium. In futures, loss is theoretically unlimited.
How can Freenance help
Freenance allows you to include options in your investment portfolio and track their impact on overall portfolio exposure and risk.
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