Financial Basics · Investing Fundamentals

Options (Basics)

Definition

An option is a contract that gives you the right — but not the obligation — to buy (call) or sell (put) a security at a specific price by a specific date. Each contract typically covers 100 shares.

Why it matters in retirement

Most retirees have no business actively trading options. But a few conservative strategies — covered calls for income, protective puts for hedging — can fit a portfolio if you understand the mechanics and the risks.

Key Numbers — 2026

Options contract size
100 shares
Typical covered-call yield
0.5–1.5% / mo
% retail traders losing money
~70–80%
Max loss on short put
Strike − premium

Pros

  • Covered calls can generate extra income
  • Protective puts limit downside
  • Defined-risk structures possible

Cons

  • Complex and time-decaying
  • Assignment risk
  • Easy to lose more than you put in (uncovered strategies)
  • Tax treatment is complicated

Common mistakes

  • Selling naked puts for "income" without understanding assignment
  • Day-trading options in a retirement account
  • Buying lottery-ticket out-of-the-money calls
  • Ignoring short-term capital gains tax on frequent trading

Related

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