An option is a contract between two people about a stock. It fixes a price and a deadline. The buyer pays for a right; the seller is paid to take on an obligation. You can choose to be a Buyer or a Seller. We will go deeper into that.
Calls and Puts
There are two types of option: a Call and a Put. Every options trade, however complicated, is built from these two.
A Call is for when you think a stock will go up. The Buyer of a Call pays a small upfront price — the premium — for the right to buy 100 shares at a fixed price (the strike) before a set deadline. If the stock rises, that right is worth more.
A Put is the mirror image: it is for when you think a stock will go down. The Buyer of a Put pays a premium for the right to sell 100 shares at a fixed price before the deadline. If the stock falls, that right is worth more.
The one-line version: buy a Call if you expect the stock to rise; buy a Put if you expect it to fall.
So how does a Buyer make money? An option is itself something you can buy and sell, and its own price moves up and down with the stock. If the stock goes the way you predicted, your option becomes worth more than you paid — you simply sell it back and pocket the difference. (Selling to get out of a trade is called closing the position.) You could instead exercise the option — actually use the right to buy or sell the 100 shares — but most Buyers never do; they just trade the option itself.
Every option has two sides. Opposite the Buyer is a Seller, who is paid the premium upfront and in return takes on the matching obligation: a Call Seller can be forced to deliver 100 shares, a Put Seller can be forced to buy them. The Buyer holds the choice; the Seller must honour it.
This course is about being the Seller — the side that collects the premium — which we explain in the next lesson. For now, just hold the four combinations in your head: buy a Call, sell a Call, buy a Put, sell a Put.
The five parts of every option
Read any option and you will see the same five pieces:
- Underlying — the stock or ETF the Option contract is based on.
- Strike price — the fixed price at which you would buy or sell the shares.
- Type — Call or Put.
- Expiration — the date the contract ends.
- Premium — the price of the option, quoted per share; one contract costs the premium times 100.
And one rule that trips up every beginner: one contract controls 100 shares. A premium quoted at $3.20 costs $320 for one contract. A strike of $190 means $19,000 of stock per contract. The numbers are bigger than they look.
Intrinsic value and time value
An option’s premium is made of two parts. Intrinsic value is the part that is real money right now — how far the option is in the money (where using it would beat the current share price). A $190 Put has $5 of intrinsic value when the stock trades at $185, because the right to sell at $190 is worth $5 more than the $185 market price.
Time value (also called extrinsic value) is everything else in the premium: the extra a Buyer pays for the chance the option moves further in their favour before it expires. The more time left on the clock, the more that chance is worth.
Time value is the Seller’s friend. It melts away a little every day and reaches zero at expiration — a decay called theta. When you sell options, that decay is working for you. You will meet theta again throughout the course.
Common beginner mistake
Thinking an option is just a cheaper way to own a stock. A share is ownership with no expiry. An option is a time-limited contract that can expire worthless — the clock is always ticking, and that clock is the whole game.
Key takeaways
- An option is a contract: the Buyer gets a right, the Seller takes an obligation, covering 100 shares.
- Buy a Call if you expect the stock to rise; buy a Put if you expect it to fall.
- Premium = intrinsic value + time value, and time value decays to zero by expiration.