What is an option

This lesson explains what a call option and a put option are, who holds the right and who holds the obligation in the contract, and how to calculate maximum loss from those two facts before you click buy. It is designed for a beginner who already understands leverage and transaction costs and wants to understand options from the mechanics side before reaching for income strategies.

An option is a right on one side and an obligation on the other

A call gives the buyer the right to buy the underlying instrument at the exercise price (strike). A put gives the right to sell at the strike. The buyer pays a premium for that right and does not have to do anything — the option can simply be allowed to expire. The seller, called the writer, takes the opposite side: collects the premium and carries the obligation if the buyer decides to exercise. The entire risk profile in options rests on that single difference.

One sentence organises the rest of the course: a long option position has a known cost in advance and defined risk, while a short option position has known income in advance and risk whose size depends on collateral. An uncovered short call has theoretically unlimited upside risk; an uncovered short put carries very large downside risk. At the learning stage, you stay with long positions and with strategies that have a calculated maximum loss, such as spreads.

Strike, expiry, and multiplier — three numbers that decide risk

Strike is the price at which you can exercise the option. Expiry is the date after which the option ceases to exist. The multiplier converts the option price into contract value, and it is the number that most often surprises beginners.

For a typical US equity contract, the multiplier is 100, but that is not a universal constant. On other markets and with other brokers it can differ, so you always check the contract value with your broker in the instrument specification, not in marketing materials.

Formulas you can calculate without a financial calculator

The whole arithmetic you need at the start is four operations. Premium in these formulas is the price per one underlying unit, and the multiplier converts it to the contract:

max_long_loss         = premium × multiplier
cost_in_PLN           = premium × multiplier × currency_rate
break_even_long_call  = strike + premium
break_even_long_put   = strike − premium

The break-even threshold is the underlying price level at which the position comes out at zero on expiry day. For a call, you add the premium to the exercise price, because you first have to recover the premium you paid. For a put, you subtract the premium from the exercise price, because you profit from a decline. Add commissions to both formulas — the real break-even threshold then sits slightly further away; the round-trip cost entry organises this concept.

Example with numbers (all figures illustrative): a call costs 2.50 USD in premium, the multiplier is 100, so contract value is 250 USD. At a rate of 4 PLN (Polish złoty) per dollar, that gives about 1,000 PLN of maximum loss, still before commissions. With 100,000 PLN of capital that is 1% of capital; with 10,000 PLN of capital it is already 10% — the same premium, a completely different decision. Check the multiplier and rate with your broker.

Protocol: from the option chain to a recorded position

You go through this sequence on demo every time, including when the first series on the list immediately appeals to you:

1. Choose one liquid underlying instrument and record its current price and the date of analysis.
2. Open the option chain and choose one series: type (call or put), strike, and expiry date. Record the premium from the order book, not from the last executed trade.
3. Calculate contract value with the formula premium x multiplier and record the result in the instrument currency.
4. Convert that value to zloty at the rate of the day and add commissions on both sides of the transaction.
5. Divide maximum loss by capital and check whether the result fits within your threshold. The starting point is the 1-2 per cent rule, and when learning on demo you go even lower.
6. Record the break-even threshold and the level at which your thesis stops being true. You set that second level before entry and do not change it during the trade.
7. Write down the number of days to expiry and the date on which you will close the position if nothing changes by then.

You perform steps three through six on paper. If after them you cannot answer how much you can lose in zloty, you do not place the order.

Table to fill in: first position card

Complete it for one call and one put on the same underlying instrument. There are as many rows as series you check.

The most important column is the percentage of capital. It shows whether the position fits within the risk budget or merely looks innocent because the premium is low in the instrument currency. The lesson on commissions and round-trip cost gives the full picture of costs.

Long call and long put — same risk profile, different direction

Both instruments have the same risk logic: you pay a known premium in advance for a right, not an obligation. They differ in the direction of the thesis, not in the risk profile. You will find more about how position structures are built from these two blocks in the lesson on basic strategies.

Options in practice: broker, multiplier, and the difference from CFDs

Options are one of the instrument classes alongside stocks, futures contracts, and cryptocurrencies — and each class has a different counterparty and a different settlement venue, which the lesson Instruments and markets compares.

Option availability depends on the broker and the market. Exchange-traded options listed in the United States have their own chain, settlement, and margin requirements, which you check with your broker before the first order. A separate product is the CFD on options that some brokers offer — that is an agreement concluded outside an exchange, and the exposure can differ from a real contract, so read the key information document, not just the instrument name. The differences between a brokerage account and a CFD are organised in the lesson on choosing a brokerage account or a CFD.

Leverage limits on CFDs for retail clients, introduced by ESMA, do not cover exchange-traded options, and you should check their current scope with your broker, because the rules are sometimes amended. KNF publishes warnings about the risks of complex products; treat them as educational material, not as confirmation that a given product is suitable for you. Do not assume that regulatory protection replaces your own loss limit — it constrains one product parameter, not the size of your position. Before you move on, master premium and pricing, because without it you cannot tell a cheap option from an expensive one.

When an option says do not trade

1. You do not know the maximum loss in zloty. Until you have the result from step five of the protocol, you do not have a decision — you have only an intention.
2. The position exceeds 1-2 per cent of capital after adding commissions. That threshold is illustrative, but it must exist before an opportunity appears.
3. You are considering an uncovered short because theta looks good. Without a defined maximum loss, one session can erase many weeks of gains.
4. You cannot point to the level at which the thesis fails. A position without such a level has no exit moment, so it holds itself.

Common beginner mistakes with options

• Treating options as cheaper leverage without understanding theta — time works against the long position regardless of whether the direction was right.
• Buying deep OTM because the premium is low — a low premium usually describes a low probability of exercise, not an opportunity.
• Ignoring the contract multiplier — a mistake in position size conversion is often an order of magnitude of difference in risk.
• Jumping straight into short premium without understanding the long profile — the order of learning matters, not just the desire for faster income.

Exercise

On demo, or on paper with a public option chain, choose one liquid instrument: a stock or an index. For an ATM call with 30-45 DTE, write down the strike, premium, multiplier, and maximum long loss in the instrument currency and approximately in zloty. Repeat the same for a put with the same expiry. Fill in the first position card and calculate what percentage of capital each one occupies. Goal: one completed table and one answer to the question of how much you can lose, without reaching for your notes.

Check yourself

Common questions

How does a long call differ from an uncovered short call?

A long position has risk limited to the premium paid. An uncovered short call carries the obligation to deliver the instrument if the price rises, and the loss has no predetermined maximum. Start by learning long positions and spreads.

Are options always safer leverage than CFDs?

A long option has defined risk, but 100% of the premium is still a 100% loss. Short premium without a limit can be more dangerous than a typical CFD position. Compare maximum loss, not how the product is presented.

Is it easy to trade options on US stocks from Poland?

It depends on the broker, the account status, and the required knowledge tests. Before moving to a live account, work through the protocol on demo and read the risk document. Do not take access for granted.

Why do we calculate maximum loss and not potential profit?

Because maximum loss is known before entry and profit is not. Profit depends on price movement, the passage of time, and volatility, so it cannot be calculated in advance. Position size is set on the basis of what is known for certain — otherwise one failed order wipes out many successful ones.