Most folks get turned off by the word "options."
But these financial assets can make you a lot of money if you use them correctly.
Today, I'm going to help you understand options by starting with the basics...
In short, an option is a contract that you enter into with another person.
The value, or "payout," of the contract is derived from the price of a stock. (That's why options are classified as a type of "derivative.")
Now, I doubt many folks reading this are contract lawyers. So it's important to note that these contracts are standardized. There's no negotiating over the terms or conditions. They're all the same. That allows them to be traded quickly in the options market.
So we're dealing with contracts, but we can buy and sell them with ease at the prevailing market price.
Options come in two main varieties: calls and puts. And you can either buy or sell them.
Let's talk about buying and selling first...
These terms often cause confusion because people think of buying and selling stock. In the case of a stock, you need to own it to sell it. Options aren't like that. You can sell one that you don't already own.
That's because, to reiterate, options are contracts. When we say we're "selling an option," that basically just means we're "writing an option."
In other words, if you want to sell an option you don't own, you're really writing a new contract and putting it up for sale.
Now, let's move on to the difference between call and put options...
A call option represents the right to buy a stock at a specified price in the future.
A put option represents the right to sell a stock for a specified price in the future.
To me, the most intuitive example is buying a put. Put buyers use them as a hedge or as insurance on a stock. That makes it an easy example to get your head around.
Let's say you own stock in a company whose shares trade for $100. You like the company and think its shares will go up. But you know stocks can be unpredictable. Rather than stand fully exposed to the downside, you can buy a put to hedge your investment.
For example, you could buy a put with a "strike price" of $90 that costs you $5 per share. (The strike price is the agreed-upon price at which shares may change hands in the future. This is the price at which a trader can exercise an option.)
Buying the put gives you the right to sell your shares for $90 each, no matter how low the stock's price may fall on the open market. Someone out there sold the put to you, so they're on the other side of the trade.
If the stock stays at $100, you have the right to sell it for $90 to the other person. You obviously wouldn't do that though, since $100 is more than $90, and you wouldn't want to miss out on that extra money. If you wanted to sell shares, you'd just do it in the open market.
The important lesson here is that, as the buyer of the put, you have the right, but not the obligation, to sell those shares. If you want to keep your shares, you can. You alone get to decide if you want to sell.
Instead, the other person – the put seller – is the one with the obligation.
From our previous example, say that the company's shares fall to $80. You still get to sell them for $90. You can "exercise" your put, and there's nothing the buyer can do about it. They must pay you $90 and take your shares. Factoring in your $5 upfront cost, you're still $5 better off than if you held an unhedged position.
Even if the stock drops even lower to $50... It doesn't matter. You still get to sell your shares to the other person for $90 (and walk away with $85 after accounting for your $5 upfront cost). You've just protected your wealth. Meanwhile, the buyer tried to make a $5-a-share profit but ended up losing $35 a share.
Buying a put as insurance is just like the insurance you buy on your home. If your home burns down and is worth practically nothing, the insurance company will give you a check for a certain value. For this peace of mind, you pay a small amount in insurance premium.
To summarize, the put buyer gets protection on their position. There is a floor on the share price. And they have to pay some dollar amount up front, which we call a "premium."
The put seller, on the other hand, gets to collect that premium as income. If the stock doesn't fall, they get to keep the premium free and clear. But if it does fall, they must stand ready to buy shares at the agreed-upon price.
Now, while put options make sense as insurance and a hedge, call options work for speculation.
A call buyer has the right to buy shares for a certain price. The call seller must provide those shares at the agreed-upon price.
Let's look at the call buyer here. Say you find a stock trading at $100 a share. You don't own any shares yet, but you think they'll rise to $110.
If you're right, you could buy shares and earn a 10% return. But you could buy a call option instead and make a much larger profit...
Let's say you pay $2 for an option with a $105 strike price. This means that no matter what happens in the market, you can buy shares for $105.
If shares rise to $110 as you expect, you can "exercise" your call and buy shares for $105 each. You can then immediately sell them in the market for $110. That means you've made a $5-per-share profit. Considering you paid $2 to buy the option at the start, you've turned $2 into $5. That's a return of 150% on the same move in the stock.
However, if the stock never trades for more than $105 a share, your option won't be worth anything. You wouldn't exercise your option and pay $105 for shares that trade at $105. You already paid $2 up front, so you'd need shares to rise to $107 to break even.
Can you see the benefit for the call seller – i.e., the person on the other side of the trade? They collect $2 up front. And depending on where the share price ends, there's a good chance they'll keep that money free and clear.
With just these simple option trades, we've got four different bets traders can make...
This table makes it easy to see what sort of bet an option trader is making. A call buyer is bullish on the stock, is paying for the right to buy shares, and has unlimited upside. Their downside is limited because they can't lose any more money than they pay out in premiums.
A put buyer, on the other hand, is bearish. They have the right (but not the obligation) to sell shares. And they can't lose more money than the initial premium, so the downside is limited.
The more a stock falls, the higher the profits for a put buyer. Since stocks can't drop below $0, the upside is technically limited.
Considering these potential payoffs, it looks like buying options – with their fantastic upside and limited downside – would be the best trading strategy.
I personally prefer option selling, because it tends to have a much higher success rate. And when used properly, you can curtail the risks to acceptable levels and turn it into a reliable stream of income.
But if you're chasing big gains, option buying is definitely the way to go.
As we said, buying options allows you to earn larger profits. But you have to properly predict big moves in stocks within a specific time frame. That can be hard to do on your own.
Fortunately, timing the market is what my colleague Greg Diamond specializes in...
See, his approach is rooted in time-based market cycles. By analyzing repeating historical patterns and monitoring several other indicators, he looks to find major turning points before they happen. Then he makes calculated trades to exploit these turning points... and earn his subscribers outsized profits.
Since launching his Ten Stock Trader newsletter in 2018, Greg has made 41 recommendations that would've doubled subscribers' money (or done even better).
In short, buying options and speculating about what the market will do next is a tough game to play alone. Let Greg help you. Click here to learn more about his trading service.
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Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
March 11, 2026