TL;DR. An option is a contract giving the buyer the right — but not the obligation — to buy or sell 100 shares of a stock at a fixed price on or before a fixed date. Calls are rights to buy; puts are rights to sell. The buyer pays a premium; the seller collects it and takes on the obligation. Everything else in options — Greeks, spreads, “IV crush” — is built on those four pieces: calls, puts, strike, expiry.
The four building blocks
A US-listed equity option is a standardized contract cleared by the Options Clearing Corporation (OCC), founded in 1973 and regulated by the SEC. The OCC sits between every buyer and seller as the central counterparty, which is why individual traders never have to trust each other to settle.
Standardized listed options themselves are a relatively young product. The Chicago Board Options Exchange (Cboe) opened for business on April 26, 1973, and traded 34,599 contracts in its first month. Every US equity option today is a lineal descendant of that first trading day.
The four terms every options trader needs cold:
- Call option — the right to buy 100 shares of the underlying at the strike price, on or before expiration. FINRA phrases it as: calls “convey to the purchaser the right, but not the obligation, to buy shares.”
- Put option — the right to sell 100 shares at the strike. Mirror image: puts convey “the right, but not the obligation, to sell shares.”
- Strike price (or exercise price) — the fixed price at which the underlying will change hands if the option is exercised.
- Expiration date — the last day the option can be exercised. Traditional monthly options expire on the third Friday of the expiration month; weeklies typically expire Fridays; LEAPS run up to about 2 years and 8 months. FINRA
One critical detail: every standardized US equity option contract represents 100 shares. So a call quoted at “$3.00” costs $3.00 × 100 = $300 for one contract, and controls $10,000 of stock if the strike is $100. Traders new to options routinely blow through position-sizing rules because they anchor on the per-share quote and forget the multiplier.
Two exercise styles exist. American-style options — including all standardized US equity options — can be exercised on any trading day up to and including expiration. European-style options — many broad index products such as SPX — can only be exercised at expiration. Options (finance) — Wikipedia
Rights vs. obligations at a glance
| Position | Right or obligation | Profitable when… | Max profit | Max loss |
|---|---|---|---|---|
| Long call (buy call) | Right to buy 100 shares at strike | Stock rises well above strike | Unlimited | Premium paid |
| Short call (sell call, uncovered) | Obligation to sell 100 shares if assigned | Stock stays at/below strike | Premium collected | Theoretically unlimited |
| Long put (buy put) | Right to sell 100 shares at strike | Stock falls well below strike | Strike − premium (stock → 0) | Premium paid |
| Short put (sell put, cash-secured) | Obligation to buy 100 shares if assigned | Stock stays at/above strike | Premium collected | Strike − premium (stock → 0) |
FINRA specifically flags uncovered (“naked”) call selling as a strategy in which “leverage can come with the risk of significant losses” — the max loss is theoretically unlimited because the stock can rally without ceiling.
A worked example: a $170 AAPL call
Suppose Apple (AAPL) is trading at $170. You buy one $170 strike call expiring in 30 days, paying a premium of $4.00 per share — $400 for the one contract (100 shares × $4.00). That $400 is your maximum loss. Option buyers can never lose more than the premium paid, because they are not obligated to do anything.
Here is the profit and loss at expiration across a range of AAPL prices:
| AAPL at expiry | Call intrinsic value | Premium paid | P&L per contract | Comment |
|---|---|---|---|---|
| $160 | $0 | −$400 | −$400 | Expires worthless (OTM) |
| $170 | $0 | −$400 | −$400 | At the money |
| $172 | $200 | −$400 | −$200 | ITM but not enough |
| $174 | $400 | −$400 | $0 | Breakeven = strike + premium |
| $180 | $1,000 | −$400 | +$600 | 150% return on premium |
| $200 | $3,000 | −$400 | +$2,600 | Every $1 above BE = +$100 |
Three ideas stand out from the table:
- Below the strike, the call is worthless at expiry and you lose the full premium.
- Between the strike and breakeven, the call is “in the money” but the intrinsic value has not yet paid back the premium. You still lose money on net.
- Above the breakeven, every $1 the stock moves adds $100 of profit — leverage in your favor, and the payoff is unlimited to the upside.
That asymmetry — capped downside, uncapped upside — is what makes long calls attractive to speculators, and also why they are dangerous. If you are wrong about direction or timing, the whole premium is gone.
Payoff diagrams
A long put is the mirror image. Suppose you buy a $170 strike AAPL put for $4.00. You profit if the stock falls; intrinsic value at expiration is max(0, strike − stock). Max profit is capped at strike minus premium — $166 × 100 = $16,600 if the stock somehow goes to zero. Max loss is the $400 premium.
Intrinsic value vs. time value
An option’s premium is the sum of two things:
- Intrinsic value — what the option is already worth if exercised right now.
- Call:
max(0, stock − strike) - Put:
max(0, strike − stock)
- Call:
- Time value (or extrinsic value) — the rest of the premium. It reflects the probability of favorable price moves between now and expiry, plus implied volatility, interest rates, and dividends. Options (finance) — Wikipedia
At expiration, time value is zero — only intrinsic value remains. This is why options are often described as “wasting assets”: every day that passes, time value bleeds away. That decay is called theta, and it accelerates as expiration approaches.
Three phrases you will hear constantly:
- In the money (ITM) — option has positive intrinsic value.
- At the money (ATM) — strike ≈ stock price.
- Out of the money (OTM) — no intrinsic value; premium is 100% time value.
Where beginners get burned
- Buying deep OTM lottery tickets. A $200 call on a $150 stock is cheap because the probability of finishing above $200 is low. The premium is real; if the stock does not rip, it goes to zero. Cheap is not the same as good value.
- Ignoring time decay. Traders correctly guess direction but pick an expiry too short. The stock moves a week after the option expires. Buying more time (further-out expiries) costs more premium up front but often is the right trade.
- Confusing “assignment” risk when selling. If you sell a call and the stock rallies through the strike, you can be assigned — obligated to deliver 100 shares at the strike. FINRA specifically calls out uncovered (“naked”) call selling as having theoretically unlimited loss potential. FINRA
- Forgetting the 100-share multiplier. A “$3.00” quoted premium is $300 per contract. A ten-lot is $3,000. Traders new to options routinely oversize positions because they anchor on the per-share quote.
Related concepts to learn next
With the four building blocks in hand, the natural next steps are:
- The Greeks — delta, gamma, theta, vega, rho — sensitivities of the option premium to price, time, volatility, and interest rates.
- Implied volatility (IV) — the market’s forecast of future stock volatility, backed out of the premium via a model such as Black-Scholes.
- Basic spreads — covered calls, cash-secured puts, vertical spreads (bull call spread, bear put spread) — combinations that trade some upside for defined risk.
- Assignment and exercise mechanics — what actually happens on Friday afternoon if you are ITM and hold to expiry.
Every one of those concepts sits on top of the same four pieces — call, put, strike, expiry.
Before trading, read the industry’s mandatory risk disclosure, Characteristics and Risks of Standardized Options, published by the OCC and required reading under FINRA rules. OCC Options Disclosure Document
Sources
- FINRA — Options (call/put definitions, 100-share multiplier, expiration types, risk disclosure)
- Option (finance) — Wikipedia (strike, expiry, American vs European style, intrinsic and extrinsic value)
- Cboe Global Markets — Wikipedia (first day of trading April 26, 1973; first-month volume of 34,599 contracts)
- Options Clearing Corporation — Wikipedia (central counterparty, founded 1973, regulated by the SEC)
- OCC — Options Disclosure Document
Disclosure: This article is for informational purposes only and is not investment advice.