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Read the Map · Lesson 3 of 9

What an Option Is

Calls and puts in plain English: strike, expiration, premium, the ×100 multiplier and break-even, plus how exercise and assignment work and why options can expire worthless.

6 min readBeginnerModule 1: Charts and Options BasicsUpdated

In this lesson

  • Explain what a call and a put give their buyer, and what the seller takes on
  • Turn a quoted premium into the real cost using the ×100 multiplier
  • Calculate the break-even price at expiration for a long call and a long put
  • Describe exercise, assignment and what happens to an option that expires out of the money

An option is a contract tied to an underlying, such as a stock or an ETF. The buyer pays for a right: to buy or sell 100 shares at a fixed price until a set date. The seller collects that payment and takes on the matching obligation. One contract controls 100 shares for much less cash than buying them, a form of leverage, so small moves in the stock can mean large percentage swings in the option, in both directions. Every option has four parts you should be able to read at a glance, and brokers usually show them together, as in “XYZ Oct 16 105 Call”: underlying, expiration, strike and type.

  • Type: a call option is the right to buy; a put option is the right to sell.
  • Strike: the fixed price written into the contract, also called the strike price.
  • Expiration: the last day the contract exists. After expiration, any rights it gave are gone. SPY lists expirations every weekday, so some of its options expire the same day they trade, known as 0DTE.
  • Premium: the option’s price, quoted per share. One contract covers 100 shares, the contract multiplier, so a premium quoted at $2.00 costs $200.

Long call (you buy a call)

  • The right to buy 100 shares at the strike
  • Tends to gain value when the underlying rises enough
  • Most you can lose while you hold it: the premium you paid
  • Break-even at expiration: strike + premium

Long put (you buy a put)

  • The right to sell 100 shares at the strike
  • Tends to gain value when the underlying falls enough
  • Most you can lose while you hold it: the premium you paid
  • Break-even at expiration: strike − premium

Example Consider this example

A stock trades at $100. You buy one $105 call expiring in 30 days for $2.00, which costs $2.00 × 100 = $200. At expiration, if the stock is at $110, the call is worth $5.00 ($500), a $300 gain. At $106 it’s worth $1.00 ($100): still a $100 loss, even though the stock finished above the strike. At $105 or below, it expires worthless and the full $200 is gone. The break-even price is $105 + $2 = $107. Hypothetical prices; fees ignored.

Payoff Slider

A profit-and-loss line for one long $105 call bought for $2.00. The line is flat at −$200 for any expiration price at or below $105, rises one-for-one above $105, crosses zero at the $107 break-even and reaches +$300 at $110. A readout shows the price, the option’s value and the profit or loss.

Slide the stock price at expiration and read the long call’s profit or loss. Illustrative; fees ignored. Illustrative sample data

A put works the same way in reverse. Say you buy a $95 put on the same $100 stock for $1.50, or $150. It gains value as the stock falls below $95, and its break-even is $95 − $1.50 = $93.50. At $90 at expiration, it’s worth $5.00 ($500), a $350 gain. At $95 or above, it expires worthless. Some investors buy puts as a hedge, a kind of insurance on shares they already own. These payoff lines show value at expiration only. Before then, an option’s price also depends on how much time is left and how much movement the market expects, which is the subject of the next lesson.

Payoff Slider

A profit-and-loss line for one long $95 put bought for $1.50. It is flat at −$150 for any expiration price at or above $95, rises as the price falls below $95, crosses zero at the $93.50 break-even and reaches +$350 at $90.

Now the mirror image: a long put. Find where the line crosses zero. Illustrative; fees ignored. Illustrative sample data

Exercise, assignment and expiration

To exercise is to use the right: buying 100 shares at the strike with a call, or selling them at the strike with a put. Exercising a $105 call takes $10,500 to pay for the shares. Most traders don’t exercise; they sell the option before expiration instead, which also captures any time value left in its price. The seller’s side is assignment: when a holder exercises, a seller is chosen to deliver the shares (on a call) or buy them (on a put). Most stock and ETF options, including SPY, can be exercised on any trading day up to and including expiration, while some index options, such as SPX, can be exercised only at expiration and settle in cash; see American vs European style. At expiration, options that finish out of the money expire worthless, and options that finish at least $0.01 in the money are generally exercised automatically unless the holder tells the broker otherwise. Once an option is exercised, you hold 100 shares (from a call) or, if you didn’t own shares, a short position of 100 shares (from a put), and that stock position can lose more than the premium you paid. That’s one reason many traders close options before they expire.

Watch out Know your downside first

Buying an option puts the full premium at risk, and a long option can expire worthless. Selling options is different: the seller collects the premium but can lose far more than that, and selling a call without owning the shares has no cap on losses. Brokers must give you the Options Disclosure Document before you can trade options. Read it before trading options.

Check your understanding

5 questions. Answer each one, then open “Show answer” to compare.

  1. Question 1 of 5 An option is quoted at $1.20. How much do three contracts cost, in dollars, before fees?

    $
    Show answer

    Answer: 360 $.

    $1.20 × 100 shares × 3 contracts = $360. Quotes are per share, and each standard contract covers 100 shares.

  2. Question 2 of 5 Scenario: you buy a $105 call for $2.00. At expiration the stock is at $106. What is your result, before fees?
    Show answer

    Answer: B. A $100 loss

    At $106 the call is worth $1.00 per share, or $100. You paid $200, so you’re down $100. Finishing above the strike isn’t enough: at expiration a long call needs the stock above strike + premium, here $107, to show a profit.

  3. Question 3 of 5 You buy a $50 put for $2.00. What is its break-even stock price at expiration, in dollars?

    $
    Show answer

    Answer: 48 $.

    For a long put, break-even is strike − premium: $50 − $2 = $48. Below $48 the put shows a profit. Between $48 and $50 it’s worth something, but less than you paid.

  4. Question 4 of 5 Scenario: you sold one $50 put and collected $1.00 ($100). At expiration the stock is at $45, the put is exercised and you’re assigned. What happens?
    Show answer

    Answer: A. You must buy 100 shares at $50, paying $5,000 for shares now worth $4,500

    The seller carries the obligation. When a put is exercised, the assigned seller must buy 100 shares at the strike: $50 × 100 = $5,000 for shares worth $4,500. You keep the $100 premium, so you’re down about $400 at that moment. The choice belongs to the buyer, who holds a right, not an obligation: a buyer can sell the option, exercise it or let it expire.

  5. Question 5 of 5 Which statements about buying a single call or put are true? Select all that apply. Select all that apply.
    Show answer

    Answers: A. While you hold it, the most you can lose is the premium you paid, plus fees · B. The option can expire worthless · D. Most traders close options by selling them rather than exercising

    While you hold the option, your maximum loss is the premium, and the option can expire worthless. You can sell it whenever the market is open, and most traders close that way. Finishing past the strike isn’t enough; the stock has to pass the break-even.

Key takeaways

  • A call is the right to buy and a put is the right to sell 100 shares at the strike until expiration. The seller takes on the obligation.
  • Quotes are per share: multiply by 100 for the real cost of one contract.
  • Long call break-even = strike + premium; long put break-even = strike − premium.
  • A long option can expire worthless, and selling options can lose far more than the premium collected.

Try it in StratosHedge

Open the Matrix for SPY and click a cell near the current price to open its contract detail. Find the strike, the bid and ask, and the open interest for both the call and the put. Multiply the ask by 100 to see what one contract would cost.

Read a real contract Needs: Retail plan

Key terms

Option
A contract giving the buyer the right, not the obligation, to buy or sell an asset at a set price by a set date. The seller takes the obligation.
Underlying
The stock, ETF or index an option is based on. For a SPY call, the underlying is SPY.
Leverage
Controlling more market exposure than the cash you put up, through borrowing or derivatives like options. It magnifies gains and losses alike.
Call option
The right to buy 100 shares at the strike price until expiration. A long call gains value when the underlying rises enough.
Put option
The right to sell 100 shares at the strike price until expiration. A long put gains value when the underlying falls enough.
Strike price
The fixed price at which an option lets you buy (call) or sell (put) the underlying. Each expiration lists many strikes.
Expiration
The date an option contract ends. After it, the contract no longer exists and any remaining rights are gone.
0DTE (zero days to expiration)
Options that expire the same day they trade. SPY and SPX list expirations every weekday, so 0DTE contracts trade daily.
Contract multiplier
The number of shares one option contract covers, which is 100 for standard US stock and ETF options.
Premium
The price of an option, quoted per share. Multiply by 100 for one standard contract: a $2.50 quote costs $250.
Break-even price
The underlying price at expiration where an option trade neither makes nor loses money. Long call: strike plus premium. Long put: strike minus premium.
Hedge
A position taken to offset risk in another position, such as buying a put to protect shares you own.
Exercise
Using an option’s right: buying shares at the strike with a call, or selling them at the strike with a put.
Assignment
When an option seller must fulfill the contract because a holder exercised: delivering shares on a call, or buying them on a put.
American vs European style
American-style options can be exercised any day up to expiration; European-style only at expiration. SPY options are American-style; SPX options are European-style and settle in cash.
Options Disclosure Document (ODD)
The OCC booklet “Characteristics and Risks of Standardized Options.” Brokers must provide it before you can trade options.
Bid
The highest price a buyer is currently offering. If you sell with a market order, you usually get the bid.
Ask (offer)
The lowest price a seller is currently willing to accept. If you buy with a market order, you usually pay the ask.
Open interest (OI)
The number of option contracts still open at a strike, not yet closed, exercised or expired. It’s published once a day.

Sources and further reading

Educational content, not investment advice. Lessons describe how markets and models tend to behave. They don’t tell anyone what to buy, sell or hold. Interactive examples use illustrative sample data, and simulator results are simulated — not actual trading. Options involve risk and are not suitable for all investors.

Risk disclosureCharacteristics and Risks of Standardized Options (OCC) (opens in a new tab)

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