# The main risks of options

The main risks of options are the loss of the whole premium for a buyer, a loss far larger than the premium for a seller, and the effects of leverage, of time and of assignment on both.

Beginner · Concept · published 29 September 2026 · last reviewed 29 September 2026
Canonical page: https://optionsbeacon.pro/learn/risks-of-options
Learn Options > Option basics

## Key points

- A buyer of an option can lose 100% of the premium, and does so whenever the option expires out of the money.
- A writer of an uncovered call faces a loss with no upper limit. A writer of a put can lose the strike price less the premium, per share.
- Leverage makes the gains and the losses of an option large against the money put in.
- Time works against the holder of an option every day, and an assignment can reach a writer on any business day.

Options are used to take risk and to reduce it, and the same contract does one or the other depending on what
else its owner holds. The risks below are the ones that belong to the contract itself. Each strategy page of this
library states its own maximum loss.

## The risk of losing the whole premium

The buyer of a call or a put can lose everything paid for it. This is not a rare outcome. An option that is out
of the money at its expiration is worth nothing, however close the stock came to the strike price.

A loss of 100% needs no large move of the stock. A call bought at the money for $1.80 is a total loss if the
stock stands at the same price on the expiration date. Shares bought on the same day would have lost nothing.

## The risk of writing an uncovered call

The writer of a call must deliver 100 shares at the strike price when the call is assigned. A writer who does
not own the shares has written an [uncovered option](https://optionsbeacon.pro/learn/glossary.md#uncovered-option) and must buy them at
the market price. That price has no upper limit, and so the loss has none.

A call written at a strike of $55 for $1.00 loses $900 per contract with the stock at $65, $4,400 with the stock
at $100 and $14,400 with the stock at $200. The premium received was $100.

## The risk of writing a put

The writer of a put must buy 100 shares at the strike price when the put is assigned. The loss is the strike
price less the price of the shares, less the premium received. It is largest when the stock falls to zero: the
strike price less the premium, per share.

A [cash-secured put](https://optionsbeacon.pro/learn/cash-secured-put.md) has the same loss as an uncovered one. The cash changes who is able
to pay for the shares, not what the shares are worth afterwards.

## The risk that comes with leverage

An option costs a fraction of the price of 100 shares and moves with them.
[Leverage](https://optionsbeacon.pro/learn/glossary.md#leverage) is the result: a move of a few percent in the stock is a move of tens of
percent in the option.

> **Example**
>
> XYZ trades at $50. A 50 call with 30 days left costs $1.80 per share, $180 per contract. Ten contracts cost
> $1,800 and move with 1,000 shares, which are worth $50,000. If XYZ stands at $49 at expiration, a fall of 2%,
> 1,000 shares have lost $1,000 and the ten calls have lost $1,800, all that was paid. If XYZ stands at $53, a
> rise of 6%, the shares have gained $3,000 and the calls ($3.00 - $1.80) × 1,000 = $1,200.
>
> *Hypothetical example for illustration only. One contract covers 100 shares; commissions, fees, dividends and taxes are ignored unless stated.*

Leverage also lets a position grow larger than its owner intended. The premium is small, so many contracts can
be bought or written with little money, and the obligations of written contracts add up.

## The risk of time

An option has an end. The part of a premium that pays for time is lost by the expiration date in every case,
which is called [time decay](https://optionsbeacon.pro/learn/glossary.md#time-decay). A holder can be right about the stock and lose money
because the move came after the expiration date, or was smaller than the premium.

## The risk of assignment for a writer

Options on stocks can be exercised on any business day. A writer can be assigned before the expiration date, an
[early assignment](https://optionsbeacon.pro/learn/glossary.md#early-assignment), and learns of it only after the trading day has ended.
The risk is highest on the day before the stock goes ex-dividend: the writer of a call who is assigned then
delivers the shares and does not receive the dividend. A writer of a put who is assigned has to pay for the
shares.

Brokers hold collateral, called [margin](https://optionsbeacon.pro/learn/glossary.md#margin), against written options. When the stock moves
against the position the broker can ask for more, and can close the position at the market price if it is not
provided.

## The risk of a market that is hard to trade in

Not every option is easy to trade. [Liquidity](https://optionsbeacon.pro/learn/glossary.md#liquidity) shows in the spread between the bid
and the ask: when it is wide, every entry and every exit costs a visible part of the premium. When trading in a
stock is halted, trading in its options is halted too. A position cannot be closed in the market during a
halt, and the writer of a put who is assigned must buy the shares whether they trade or not.

## What a broker requires before options can be traded

A broker must approve an account for options trading before the first order. Brokers generally offer several
levels of approval, which stand for different degrees of risk, and decide which one an account receives. The
broker also provides the [Options Disclosure Document](https://optionsbeacon.pro/learn/glossary.md#options-disclosure-document), the booklet
"Characteristics and Risks of Standardized Options", at or before the time the account is approved. It
describes these risks in detail.

## Terms used on this page

- **Leverage**: Controlling a position worth more than the money paid for it. A premium is a fraction of the price of 100 shares, so a small move of the stock is a large move of the option, in both directions.
- **Uncovered option**: A written option with no offsetting position, such as a call written without owning the shares. The loss of an uncovered call has no upper limit, because the price of a stock has none.
- **Time decay**: The loss of an option's time value as its expiration comes closer. It is measured by theta, and for options at the money it speeds up in the last weeks.
- **Early assignment**: The assignment of a written option before its expiration date. It can happen on any business day for American-style options, most often when little time value is left or just before an ex-dividend date.
- **Margin**: The cash or securities that a broker requires from the writer of an option as collateral for the obligation. The amount required changes with the price of the underlying.
- **Liquidity**: How easily a position can be entered or left at a fair price. A liquid market shows a narrow spread between the bid and the ask and a large number of contracts on both. High volume or open interest is not the same thing.
- **Options Disclosure Document**: The booklet "Characteristics and Risks of Standardized Options", published by the Options Clearing Corporation. A person must receive a copy before buying or selling an option, and brokers provide it.

## Sources

1. [Characteristics and Risks of Standardized Options](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document), The Options Clearing Corporation (read 29 September 2026). The options disclosure document, edition of June 2024.
2. [An Introduction to Options – Investor Bulletin](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-63), U.S. Securities and Exchange Commission (read 29 September 2026).
3. [Opening an Options Account – Investor Bulletin](https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-77), U.S. Securities and Exchange Commission (read 29 September 2026).
4. [Leverage & Risk](https://www.optionseducation.org/optionsoverview/leverage-risk), The Options Industry Council (read 29 September 2026).
5. [Naked Call (Uncovered Call, Short Call)](https://www.optionseducation.org/strategies/all-strategies/naked-call-uncovered-call-short-call), The Options Industry Council (read 29 September 2026).
6. [Naked Put (Uncovered Put, Short Put)](https://www.optionseducation.org/strategies/all-strategies/naked-put-uncovered-put-short-put), The Options Industry Council (read 29 September 2026).
7. [Options Assignment](https://www.optionseducation.org/referencelibrary/faq/options-assignment), The Options Industry Council (read 29 September 2026). Frequently asked questions.
8. [General Information](https://www.optionseducation.org/referencelibrary/faq/general-information), The Options Industry Council (read 29 September 2026). Frequently asked questions.
9. [Options - Risks](https://www.finra.org/investors/investing/investment-products/options/risks), Financial Industry Regulatory Authority (read 29 September 2026).
10. [FINRA Rule 2360. Options](https://www.finra.org/rules-guidance/rulebooks/finra-rules/2360), Financial Industry Regulatory Authority (read 29 September 2026).

## Related topics

- [Exercise, assignment and expiration day](https://optionsbeacon.pro/learn/exercise-assignment-expiration.md)
- [Theta and time decay](https://optionsbeacon.pro/learn/theta-time-decay.md)
- [How to read a payoff diagram](https://optionsbeacon.pro/learn/how-to-read-a-payoff-diagram.md)
- [Moneyness, intrinsic value and time value](https://optionsbeacon.pro/learn/moneyness-intrinsic-and-time-value.md)
- [How to read an option chain](https://optionsbeacon.pro/learn/how-to-read-an-option-chain.md)

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Educational content from Options Beacon. It is not investment, tax or legal advice, and not a recommendation to buy or sell any security or to use any strategy. Options involve risk and are not suitable for all investors; an option seller can lose far more than the premium received. Before trading options, read [Characteristics and Risks of Standardized Options](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document).

Articles are drafted with AI assistance and checked against the sources listed on each page.