Meaning and example
An option gives the buyer a contractual right to buy or sell an underlying asset, or receive the corresponding cash settlement, on stated terms. The buyer usually pays a premium for that right. The seller assumes a related obligation, so the buyer’s and seller’s risks cannot be treated as identical.
If the buyer of a simple standalone option does not exercise because exercising has become uneconomic, the premium may be lost. The seller’s position is different: exercise can create substantial obligations. For option combinations and positions in the underlying asset, total risk is determined by the whole structure, not by one amount paid.
Limits and scenario analysis
An option is not a guarantee of profit from the market moving in the expected direction. Price depends on remaining time, expected volatility and other parameters. Understand the strike price, settlement type and whether early exercise is possible. Buying, selling and multi-leg strategies require separate scenario analysis, especially where leverage is present. Related reading: [futures and options](/guides/futures-and-options/), [futures](/glossary/fyuchers/) and [derivative instrument](/glossary/proizvodnyy-instrument/).