How Do Stock Options Work?

Key takeaways

• An option is a contract that allows the buyer to buy or sell shares of stock at an agreed-upon price.
• Investors can get outsized returns by using options instead of simply owning stocks.
• Be forewarned that higher rewards come with higher risk. Knowing how to hedge your positions to protect yourself from potentially unlimited losses is imperative.

Everyone knows that you can make money investing in stocks by buying low and selling high. However, there are ways to make money in the stock market even when prices are down and volatility is up. Selling options is one strategy that can be lucrative but risky.

Read on to learn how options work, the risks, and how to get started.