Educational content only — not investment advice. Options involve risk, including the possible loss of principal, and are not suitable for every investor. Nothing here is a recommendation to buy or sell any security.
An option is a contract that gives you the right — but not the obligation — to buy or sell a stock at a set price before a set date. That one sentence is 90% of what you need. Everything else is details about price and time.
Key terms (read this box once, then forget it)
| Term | Plain-English meaning |
|---|---|
| Contract | One option contract controls 100 shares of the stock. Prices are quoted per share, so a $2.00 quote costs $200. |
| Strike price | The set price in the contract — the price you'd buy or sell at if you used the option. |
| Expiration | The date the contract dies. After that, it's worthless if unused. |
| Premium | The price you pay (buyer) or collect (seller) for the contract. Quoted per share. |
| Holder / buyer | The one who holds the right. Pays the premium up front. |
| Writer / seller | The one who sold the right and must honor it if the holder uses it. Collects the premium up front. |
| In the money (ITM) | The option would pay something if used right now. |
| Out of the money (OTM) | The option would pay nothing if used right now — it's a bet on a future move. |
| At the money (ATM) | Strike is about equal to the current stock price. |
Calls: the right to buy
A call gives the holder the right to buy 100 shares at the strike price before expiration. You buy calls when you think the stock will go up — it lets you control 100 shares for a fraction of the cost of buying them outright.
Worked example: buying a call
A stock trades at $50. You buy one $55 call expiring in a month for a $2.00 premium — that's $200 total (1 contract × 100 shares × $2.00).
- Stock jumps to $62 before expiration. Your right to buy at $55 is now worth $7 per share ($62 − $55). The contract is worth about $700. You paid $200 → profit ≈ $500, before commissions.
- Stock sits at $50 through expiration. The right to buy at $55 is worthless. You lose the $200 premium. That's the most a call buyer can ever lose: what they paid.
Notice the asymmetry: risk is capped at $200, but the upside scales with the stock. That's what you're paying for.
Puts: the right to sell
A put gives the holder the right to sell 100 shares at the strike price before expiration. You buy puts when you think the stock will go down — or as insurance on shares you already own.
Worked example: buying a put
A stock trades at $50. You buy one $45 put for a $1.50 premium — $150 total.
- Stock drops to $38. Your right to sell at $45 is worth $7 per share ($45 − $38) → about $700. You paid $150 → profit ≈ $550.
- Stock stays above $45 through expiration. The put expires worthless. You lose the $150 premium — again, the most a buyer can lose.
The other side: selling options
Every buyer needs a seller. The writer collects the premium up front and takes on the obligation:
- Sell a call → you may be forced to sell 100 shares at the strike. If you already own the shares, that's a covered call (Lesson 4). If you don't, it's naked — and your risk is theoretically unlimited, because a stock can keep rising.
- Sell a put → you may be forced to buy 100 shares at the strike. If you keep the cash ready, that's a cash-secured put (Lesson 5).
Sellers win most often — most options expire worthless — but their wins are small (the premium) and their losses can be large. Buyers lose most often, but their losses are capped and their wins can be multiples of what they paid. Neither side is "better"; they're different risk shapes.
Common mistakes
- Buying far-out-of-the-money weeklies because they're cheap. A $0.10 contract looks like a lottery ticket because it is one. Cheap usually means "almost certainly expires worthless."
- Forgetting the ×100. A $0.50 move in the quote is $50 per contract. Always do the multiplication before you click.
- Ignoring expiration. An option is a wasting asset — every day that passes, it loses a little value even if the stock doesn't move. (More on this in the greeks lesson.)
- Selling naked calls as a beginner. Unlimited risk for limited premium is a trade for people who deeply understand what can go wrong.
The takeaway
Calls = right to buy (bullish). Puts = right to sell (bearish). Buyers pay premium for capped risk and open-ended reward; sellers collect premium for steady small wins against occasional large losses. One contract = 100 shares, always.
Check your understanding
Next: Lesson 4 — Covered calls: getting paid on stocks you own → (or continue the path: Lesson 2, Reading an options chain — coming soon)
Educational content only — not investment advice. Options involve risk, including the possible loss of principal. Do your own research before trading.