If you buy $500 worth of QQQ call options and hold them until expiry without ever reaching the strike price, you will have lost your initial $500 and no more.
This is true whether you buy call or put options - you can only lose as much as you put in when you buy options.
However, selling an option is different
An option writer collects a premium when he sells the contract to a buyer. In the example above, the buyer pays the writer a premium of $500 for the rights provided in the option contract. If the contract expires worthless, the buyer has run out of $500 and the writer receives the premium.
Most option contracts eventually expire worthless, but option writers open themselves to a potentially unlimited risk of loss.
If a writer sells a call option before the stock melts back down, he could lose far more than the premium he collected - in theory, the potential losses are unlimited. Because of this increased risk, most brokers only allow inexperienced traders to buy calls and puts. To gain access to options sales, greater investment experience is usually required.
The difference between stocks and options
Options are valued on the basis of their underlying shares, but the contracts are derivatives and do not provide a claim to equity, as is the case with share ownership.
The first formula for valuing options is called the Black-Sholes formula, but today the majority of options on American exchanges are priced using the binomial pricing model.
Option risk can be measured using four different factors, each named after a Greek letter of the alphabet.
Delta - The primary Greek risk factor is the rate between the option price and the price of the underlying stock. Delta is often used for hedging as it provides the number of shares needed to offset the option position (i.e. a delta of 0.6 means 60 shares must be purchased to equal 1 put).
Gamma - The rate of change between option delta and the underlying share price. Gamma attempts to measure how much the option delta would move relative to movements in the stock.
Theta - All options have an expiry date, which means that their value decreases as this expiry date approaches. Theta measures this time decay factor in relation to the option price.
Vega - V stands for volatility. Vega measures the option price relative to the volatility of the underlying asset. An increase in stock volatility does not always affect an option in the same way, hence the need to measure Vega.
Summary about equity options
Options are not the most complex derivatives in the trading world in https://exnesslatam.com/demo-cuenta/, but understanding how they move in relation to their underlying stocks can take time to learn. There's a reason brokers limit the amount of options trading novices can do - options involve leverage, and making a mistake can cost you more than the value of your account.
Writing options is an advanced trading strategy that is not suitable for those without experience or sufficient risk appetite. Buying options involves less risk, but the volatility of derivatives can unsettle certain traders.
However, if you are a confident trader looking to increase leverage without using margin, options can provide an avenue for the outsized profits you are looking for.