What are options? The basic terms in plain words

An option is a standardized contract between a buyer and a seller. The buyer pays a price, the premium, and gets a right: to buy the underlying at a fixed price (a call) or to sell it at a fixed price (a put), until the contract expires. The seller, also called the writer, keeps the premium and takes on the matching obligation if the buyer uses that right.

In the US, listed options trade on exchanges and clear through the Options Clearing Corporation (OCC), so you never have to find the person on the other side yourself. There are options on single stocks, on ETFs such as SPY and QQQ, and on indexes such as the S&P 500 (SPX). Six terms cover most of what you will see:

Underlying
The stock, ETF or index the option is based on. The underlying's price is the main thing that moves the option's price.
Premium
The price of the option, quoted per share. A quote of $2.50 on a standard contract costs $250, because one contract covers 100 shares.
Strike price
The fixed price at which the holder can buy the underlying (with a call) or sell it (with a put).
Expiration date
The last day the contract exists. Standard monthly options expire on the third Friday of the month. Many stocks and ETFs also list weekly expirations, and as of October 2026 SPX and SPY have expirations every trading day.
Contract multiplier
How many shares one contract covers. For a standard US stock or ETF option it is 100, so every per-share price is multiplied by 100.
Options chain
The table that lists every strike and expiration for one underlying, with calls on one side and puts on the other, and a bid and ask for each.

Calls and puts: the two types of options

A call gives the right to buy the underlying at the strike. A call buyer wants the price to rise above the strike by more than the premium paid. A put gives the right to sell at the strike. A put buyer wants the price to fall below the strike by more than the premium.

So the simplest map is this: if you expect the stock to rise, you look at calls; if you expect it to fall, you look at puts. The breakeven math, the strike rules for each side and worked examples are in our call vs put guide.

Buying vs selling options: why the risk is not equal

Every option has a buyer and a seller, and their risks mirror each other but are not the same size. The buyer pays the premium in full up front and holds a right, not a duty. If the trade fails, the buyer loses at most that premium.

The seller collects the premium, and that premium is the most the seller can make. In exchange, the seller must perform if assigned: sell 100 shares at the strike for a short call, or buy 100 shares at the strike for a short put. With American-style options, which include all options on US stocks and ETFs, assignment can come on any business day while the short position is open. That asymmetry is why brokers put uncovered selling behind stricter approval and margin requirements, and why beginner material usually starts with buying.

  • Buy a call: the most you can lose is the premium; the gain grows as the stock rises above the strike.
  • Buy a put: the most you can lose is the premium; the gain grows as the stock falls below the strike.
  • Sell a call without owning the shares (an uncovered, or naked, call): the maximum loss is theoretically unlimited, because a stock price has no ceiling.
  • Sell a put: the maximum loss is the strike minus the premium, times 100, reached if the stock goes to zero. On a $50 strike that is close to $5,000 per contract.

American vs European options: when can you exercise?

Exercise style decides when the holder can use the right. American-style options can be exercised on any business day up to and including expiration. European-style options can be exercised only at expiration. All exchange-traded options on US stocks and ETFs are American-style; most index options, including SPX, are European-style.

Settlement differs too. Exercising a stock or ETF option means real shares change hands, 100 per contract, settled one business day later. SPX options settle in cash instead, so no shares are delivered and there is no early assignment. Our guide to SPX vs SPY options compares the two side by side.

Expiration hides a trap for beginners. At expiration, the OCC automatically exercises equity options that are in the money by $0.01 or more, unless you tell your broker not to. One exercised call on a stock means buying 100 shares at the strike, which can be far more cash than the option cost. Many traders sell their options before the close on expiration day to avoid this. Read your broker's own expiration rules before you hold a contract into its last day.

How are options quoted, and why does the spread matter?

An options chain shows a bid and an ask for every contract. The bid is the best price someone will pay you right now; the ask is the best price someone will sell to you. The gap between them is the bid-ask spread, and it is a real cost: you tend to buy near the ask and sell near the bid.

A hypothetical: a call is quoted $2.40 bid and $2.60 ask. Buy at the ask and sell straight back at the bid, and you lose $0.20 per share, or $20 per contract, before the stock moves at all. On a $2.50 option that is 8% of the premium. A spread of a few cents on a heavily traded contract and a spread of 30 cents on a thinly traded one make for very different trades. Read these columns before the price:

  • Volume: contracts traded so far today. More volume usually comes with tighter spreads.
  • Open interest: contracts opened in earlier sessions and not yet closed. It shows whether a strike has an active market.
  • Last: the price of the most recent trade. On quiet contracts it can be hours old, so trust the live bid and ask more.
  • Order type: use limit orders. A market order on a wide spread can fill far from the midpoint.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn options chain: calls on the left, puts on the right and strikes in the middle, with bid, ask, volume and open interest columns on each side. Most numbers are left as scribbles; one call row is highlighted with a $2.40 bid and a $2.60 ask: you sell near the bid and buy near the ask, and the $0.20 spread is $20 a contract, 8% of a $2.50 option.

Time decay and implied volatility, in one paragraph each

Time decay (theta). An option's premium is its intrinsic value, the amount it is in the money, plus time value. Time value shrinks every day, and the shrinking speeds up as expiration nears, most of all for at-the-money options. For a buyer, being right about direction is not enough; the move has to come soon enough. Theta and the other Greeks are explained in our options Greeks guide, and same-day contracts, where decay is fastest, in 0DTE options.

Implied volatility (IV). IV is the size of future moves the market is pricing into an option, worked backward from its premium. Higher IV makes options more expensive; lower IV makes them cheaper. IV often climbs before a known event such as earnings and drops after it, so an option bought before the report can lose value even when the stock moves your way. Our implied volatility guide shows how to check it before you buy.

How to trade US options from outside the US

You trade US-listed options through a brokerage account that offers them. If you live in Saudi Arabia, elsewhere in the Gulf or anywhere outside the US, check that your broker is licensed by your country's regulator and that it offers US options, not only US stocks. Then expect these steps:

  1. Open and fund the account. US options are priced in US dollars, so count currency conversion costs if your account is in another currency.
  2. Apply for options trading. US rules require the broker to approve your account before you trade options. You fill in an options agreement about your experience, income and goals, and the broker approves you for a specific level. Each broker defines its own levels; uncovered selling is treated as one of the riskiest strategies.
  3. Read the risk disclosure. Before approval, the broker must give you the Characteristics and Risks of Standardized Options, a booklet published by the OCC. It is long, but its risk chapter is worth an evening.
  4. Expect a tax form. A US broker may ask you for IRS Form W-8BEN, which certifies that you are not a US person for US tax withholding. How your gains are taxed at home depends on where you live, so check locally.
  5. Plan around the clock. Options on US stocks generally trade from 9:30 a.m. to 4:00 p.m. ET, and options on some broad-based ETFs and indexes until 4:15 p.m. ET. In Riyadh, 9:30 a.m. to 4:00 p.m. ET is 4:30 to 11:00 p.m. until November 1, 2026, then 5:30 p.m. to midnight. Holidays and a live clock are on our US stock market hours page.

How to choose an options contract: strike, expiration and size

Start with the plan on the stock chart, then pick the contract that fits it, not the other way round. Four choices matter:

  • Strike. In-the-money contracts cost more but move more like the stock. Out-of-the-money contracts cost less but need a bigger move just to reach breakeven. At-the-money sits between. Our guide on how to choose a strike price walks through the trade-offs.
  • Expiration. More time costs more premium, but it decays more slowly per day and gives your move room to happen. Choose an expiration that outlasts your plan, not one that ends the day your target might be hit.
  • Size. When you buy, the premium is the money at risk. Size so that losing all of it costs a small, fixed share of your account. The options profit calculator shows cost, breakeven and the result at expiration, and the position size calculator explains fixed-risk sizing.
  • Liquidity. Prefer underlyings and strikes with steady volume, real open interest and tight spreads.

A worked options trade, step by step (hypothetical)

Everything here is made up to keep the math simple. It is not a forecast, and real option prices depend on the time left and implied volatility. A stock, call it XYZ, trades at $100. Your plan on the stock chart: buy above $100, stop at $97 where the idea is wrong, target $106. Instead of shares, you buy one call with a $100 strike that expires in 30 days, for $3.00. Cost: $300 plus fees. That $300 is the most you can lose, and breakeven at expiration is $103. Your exit rule: sell the call when XYZ hits $97 or $106, or after 10 trading days if neither has hit.

Three outcomes follow. The gain is shown for completeness, not because it is typical:

  • Outcome A, a loss. Four days later XYZ falls to $97 and hits your stop on the stock chart. The call is now out of the money and has lost value; say it is $1.30 bid. You sell for $130, a $170 loss. Had you ignored the stop and held to expiration with XYZ below $100, the call would have expired worthless and the loss would be the full $300.
  • Outcome B, a gain. A week later XYZ reaches $106, your target. Say the call is now $6.60 bid: $6 of intrinsic value plus $0.60 of time value still left. You sell for $660, a $360 gain.
  • Outcome C, right direction, still a loss. XYZ drifts up slowly and sits at $102 on expiration day. The call is worth its intrinsic value, $2.00. You get $200 back on a $300 cost, a $100 loss even though the stock rose. This is time decay at work, and it is why the time stop belongs in the plan.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn bar chart of the worked trade, one $100 call bought for $3.00 ($300): outcome A, the stop at $97 and the call sold at $1.30, −$170; outcome B, the $106 target and the call sold at $6.60, +$360; outcome C, the stock at $102 at expiration and the call worth $2.00, −$100. A dashed red line marks the maximum loss, the $300 paid.

Common options trading mistakes beginners make

These mistakes show up again and again in new options accounts:

  • Buying far out-of-the-money options because they look cheap. A low premium usually means the stock needs a big move, fast, just to reach breakeven.
  • Ignoring the spread. A wide bid-ask spread can take a large slice of the premium on every round trip.
  • Holding through earnings without checking implied volatility. The drop in IV after the report can erase the gain from the move.
  • Selling options before understanding assignment and margin. A short option can lose many times the premium collected.
  • Having no exit plan. Decide before you enter where you sell: a level on the stock chart, a share of the premium, or a date.
  • Sizing by the number of contracts instead of by dollars at risk.
  • Letting an in-the-money option reach expiration without the cash or approval to handle 100 shares per contract.
  • Starting with same-day (0DTE) contracts, where fast decay and small moves swing the price hardest.

Where a signal tool like UpTickFlow fits

UpTickFlow is our own invite-only TradingView indicator. It runs on the chart of the underlying, such as SPY, QQQ or a single stock, on 5-minute to 1-hour timeframes. It does not read options data, choose strikes or expirations, or place trades, and it was not built or tested specifically for options.

What it gives you is the trigger and the levels. Each signal appears after the candle closes, does not repaint, and comes with an entry, a stop and a target drawn on the chart. It scores setups from 0 to 100, shows only A+ setups, and stays quiet in choppy markets, abnormal volatility, the first minutes after the open, the midday lull and the last 30 minutes. An options trader can use those stock levels as the plan in the worked example above: choose the contract, then exit the option when the underlying hits the stop, the target or a time stop. The option can still lose its whole premium, decay can eat a slow move, and a gap can jump past any stop.

For holding periods, see options scalping on 5-minute signals and swing trading options on 1-hour signals. Our guide to trading options with TradingView goes deeper, and the UpTickFlow home page has the indicator details.