Options & Derivatives

The basics, the advantages and the risks.

What are options?

A candlestick chart beside a column of bid and ask prices on a trading screen

Options are derivatives: financial instruments that derive their value from an underlying security or financial instrument.

The underlying asset can be, among other things, a stock, a stock index or a fund that trades on an exchange.

An option gives the buyer the right, but not the obligation, to buy (call) or sell (put) an asset at an agreed price (the strike price), during a set period or on a set date.

The buyer pays the seller, or writer, a premium for the contract.

Four positions

Buyer of a call: the right to buy
Seller of a call: the obligation to sell
Buyer of a put: the right to sell
Seller of a put: the obligation to buy

Source: US CFTC Glossary, read 31 October 2026.

The family

Option: The right to buy or sell at a specific price.
Future: Binding contracts to buy or sell assets at future dates.
Swap: Exchange cash flows based on underlying assets.
CFD: Contracts for Difference - trade price movements without owning the underlying.

Sources: US CFTC Glossary, read 31 October 2026; ETTFOS.

How do options work?

The buyer pays a premium
The buyer pays the premium up front to the seller. It is not refunded.
The buyer holds a right
A call gives the right to buy at the strike price, and a put the right to sell at it, for a set period.
The seller takes on a duty
If the buyer uses the right, the seller must sell (for a call) or buy (for a put) at the strike price.
Exchanges bring them together
Options trade on securities exchanges, among institutions, professional traders and individual investors.
Close, use or expire
Before expiry, the holder can sell the option or use the right. If it expires out of the money, the whole premium is lost.

A candlestick price chart on a trading screen, softly out of focus

What do the key words mean?

Strike price: The price at which the buyer may buy (with a call) or sell (with a put).
Expiration date: The day the option expires: the last day its right can be used.
Holder and writer: The holder is the buyer of an option. The writer is the seller.
Exercise: Using the right to buy or sell.
In and out of the money: A call is in the money when the strike price is below the asset’s price, and a put when it is above. Out of the money is the opposite.
Volatility: How much and how fast a price moves up and down.

What moves option prices?

An option’s premium depends on several things, including the asset’s price compared with the strike price, the time left until expiry, and how much the asset’s price swings.

An option’s premium has two parts:

Intrinsic value: how far the underlying price is above a call’s strike price, or below a put’s.
Time value: the rest of the premium. The longer the time until expiry, the greater it is.

Option prices also imply the underlying’s volatility.

Whatever affects the underlying asset’s price also affects the option’s value, indirectly.

What are the advantages?

People use options to speculate, or to reduce the risk of holding an asset.

For example, someone who owns shares can buy a put: the right to sell them at the strike price, even if their price falls lower. The premium is the cost of that right.

A trader's hand holding a phone with a candlestick chart, trading screens behind

What are the risks?

It is possible to lose more than your initial investment. Some options strategies may even expose you to unlimited losses.
US SEC staff, US CFTC
The purchaser of a put or call risks losing the entire purchase price of the option: the premium plus all transaction costs.
US CFTC
In March 2018 the EU’s securities regulator said analyses across EU jurisdictions showed that 74–89% of retail accounts typically lose money on CFDs.
ESMA

How can ETTFOS help?

Successful traders follow a proven system.

One framework, taught since 1997.

A disciplined, rules-based approach to trading, with risk management at the heart of every decision.
Clear rules for entries, exits and risk.
Entry, target and stop, decided before the trade.

The strategies apply to every time frame, from day trading to the long term, without frantic buying and selling.

ETTFOS courses cover the markets in different depth.

Taught live online or in person, in small, interactive groups.

Next step

Explore the program

Advanced Techniques — Options in Stocks Advanced Techniques — Options in Futures

ADVANCED · AFTER QUANTUM LEAP

ETTFOS is not an investment advisory service or a broker-dealer, and it does not tell anyone what to buy or sell.

Options & Derivatives

What are options?

Four positions

The family

How do options work?

The buyer pays a premium

The buyer holds a right

The seller takes on a duty

Exchanges bring them together

Close, use or expire