Options 101

An option is a contract. It gives one side the right — but not the obligation — to buy or sell something at a set price, up until a set date. The other side takes on the matching obligation, and gets paid up front for it.

That single sentence carries the whole idea. The rest of this lesson is just unpacking the four things every option contract names: what it lets you do, at what price, by when, and what it cost.

The two kinds: calls and puts

There are exactly two flavours of option.

• A call gives you the right to buy the underlying at a fixed price.
• A put gives you the right to sell the underlying at a fixed price.

"The underlying" just means the thing the contract is written on — a stock, an index like the S&P 500, an ETF. One equity option contract almost always controls 100 shares of it, so prices get multiplied by 100 when money actually changes hands.

A useful way to hold it in your head: a call is a bet that "I might want this later, lock me a price now." A put is the mirror image — "let me sell at this price even if the market falls below it."

The strike price

The fixed price written into the contract is the strike. It is the reference point everything else is measured against.

If you hold a call with a strike of 100, you can buy the underlying for 100 no matter where the market actually trades. If it climbs to 130, your right to buy at 100 is clearly worth something. If it sits at 90, nobody would use the right to buy at 100 when the open market is cheaper — so the right expires worthless.

Puts work the other way: a put struck at 100 lets you sell at 100, which matters when the market drops below 100.

Expiry and exercise

Every option has an expiry date — the last day the right exists. Use it before then or it's gone.

Some products expire monthly; index options like the S&P 500 now have expirations almost every trading day. An option expiring today is called a 0DTE ("zero days to expiry") option, and these have become a huge share of daily volume.

Using the right is called exercising. Most options are never exercised — traders simply buy and sell the contracts themselves before expiry, the same way you'd trade a stock. The contract has a price of its own that moves around all day.

Premium: what it costs

The price you pay to own an option is the premium. The buyer pays it; the seller collects it and keeps it no matter what happens next.

The premium is the most you can lose as a buyer. Buy a call for a premium of 3 (so $300 for the 100-share contract) and the worst case is the option expires worthless — you're out the $300, nothing more. The seller's position is the opposite shape: they keep the $300 if the option dies, but they carry the obligation if it doesn't.

This asymmetry — capped, known cost for the buyer; an open-ended obligation for the seller — is exactly why sellers care so much about managing their risk. That management is hedging, and it's the thread we follow through the rest of the track.

Moneyness: where the strike sits vs the market

"Moneyness" is the jargon for how the current price compares to the strike.

• In the money (ITM) — exercising it right now would have value (a call struck below the market; a put struck above it).
• At the money (ATM) — the strike sits right around the current price.
• Out of the money (OTM) — exercising would make no sense yet (a call struck above the market; a put below it).

Moneyness isn't fixed — as the market moves through the day, an option slides between these states, and its premium moves with it.

Putting it together: a long call

Here's the whole contract in one picture. This is a long call — you've bought the right to buy at the strike. Below the strike the option is worthless and you've lost only the premium. Above the strike its value climbs with the market; the break-even is the strike plus the premium you paid.

Hover the curve to read the P&L at any underlying price.

One picture

A long call drawn out: the horizontal axis is where the underlying might land at expiry, the vertical axis is what the contract is then worth.

Capped loss

Below the strike the right to buy is worthless. You lose only the premium you paid — a flat floor, no matter how far the market falls.

Open-ended upside

Above the strike the value climbs with the market, dollar for dollar. The loss is capped; the upside is not.

Break-even

The line crosses zero at the break-even — the strike plus the premium. Past it, the premium is earned back and the position turns a profit.

Read the line, not a recommendation: it simply shows what the contract is worth at expiry for each price the underlying might land on. The flat part is the capped loss; the kink is the strike; the rising part is the open-ended upside that the premium bought.

What to carry forward

• An option is a right (buyer) matched by an obligation (seller).
• Call = right to buy; put = right to sell.
• Strike = the fixed reference price; expiry = the deadline; premium = the up-front cost.
• Moneyness describes where the strike sits relative to the market right now.
• The seller's open-ended obligation is why hedging exists.

Next we look at how an option's price changes — the Greeks — which is the language the whole terminal is built on.

Next step

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