Can you lose more than the option premium?

Either way, you could lose many times more money than the premium received. The premium for options is constantly changing.

Can you lose more than the option premium?

Either way, you could lose many times more money than the premium received. The premium for options is constantly changing. It depends on the price of the underlying asset and the amount of time remaining in the contract. The deeper a contract is in the money, the more the premium will increase.

Conversely, if the option loses intrinsic value or goes further away from money, the premium falls. A call option gives you the right, but not the requirement, to buy a stock at a specific price (known as the strike price) on a specific date, when the option expires. For this right, the buyer of the call will pay an amount of money called the premium, which will be received by the seller of the call. Unlike stocks, which can live in perpetuity, an option will cease to exist after it expires and will end up worthless or with some value.

When buying options, whether call or put, your maximum potential loss is the premium you paid to open the position. So, yes, your maximum loss would be the money you invested in the position. Some option traders specialize in selling premium. They find options with high premiums that they think will expire worthless and sell those options.

These traders collect premiums as soon as they sell the options. If the options expire worthless, then the trade is terminated and they keep the premium. For a relatively small initial cost, you can enjoy gains from a stock above the strike price until the option expires. If you plan to buy an option during the earnings season, an alternative is to buy one option and sell another, creating a spread.

This favors the bullish investor (one with an optimistic view of the market), who can buy single call options at a relatively favorable price. Your options contract may be cashless, but it will eventually have value due to a significant change in the market price of the underlying asset. More options, by definition, means that the options market is not likely to be as liquid as the stock market. With options, depending on the type of trade, it is possible to lose your initial investment and infinitely more.

It's never a good idea to establish your position with a 10% loss from the start, simply by choosing an illiquid option with a wide margin of supply and demand. Stock traders trade just one stock, while options traders can have dozens of options contracts to choose from. For almost all stocks or indices whose options are traded on an exchange, put options (put options at a fixed price) are priced higher than call options (call options at a fixed price). The intrinsic value of an option is the amount of money investors would make if they exercised the option immediately.

One of the factors driving the price difference is the result of volatility bias (the difference between implied volatility for out-of-money, in-money, and monetary options). Trading illiquid options increases the cost of doing business, and the costs of trading options are already higher, in percentage terms, than those of stocks. Exchanges quote option prices in terms of the price per share, not the total price you must pay to own the contract. As a senior options analyst at Ally Invest, Brian Overby is a sought-after resource for his knowledge of options trading and his vision of the market.

Ivy Kolis
Ivy Kolis

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