An option is a contract with specified terms and an expiry date. Buying an option gives its holder a right. Selling an option creates an obligation if the seller is assigned. Understanding that difference comes before comparing strategies.
Calls and puts
A call gives its holder the right to buy the underlying asset at the strike price, subject to the contract terms. A put gives its holder the right to sell. The strike is the agreed exercise price; the premium is the price paid for the option.
A standard US equity option typically covers 100 shares. Adjusted contracts and other products can differ, so check the actual specification. A premium quoted at $2 per share usually means $200 for one standard 100-share contract, before fees.
A worked call example
Suppose you buy one hypothetical standard equity call with a $100 strike for $3 per share. Your premium outlay is $300. The following simplified outcomes are at expiry, before costs, and express intrinsic value less premium; they are not forecasts or early-sale prices.
| Stock price at expiry | Call intrinsic value per share | Net result per contract |
|---|---|---|
| $95 | $0 | −$300 |
| $100 | $0 | −$300 |
| $103 | $3 | $0 |
| $110 | $10 | +$700 |
The expiry break-even is $103: strike plus premium. A rise in the stock is not automatically enough to produce a profit. Before expiry, an option’s market price also reflects remaining time and other factors, including expected volatility.
Exercise and assignment
Exercise is the holder’s use of the contractual right. Assignment allocates the corresponding obligation to an option seller. For a physically settled equity call, an assigned seller must deliver shares; for a physically settled equity put, the seller must buy them at the strike price.
American-style options can generally be exercised before expiry. European-style options have different exercise timing, and some products settle in cash. Check your contract and broker’s procedures. Closing an option position is different from exercising it.
Buying and selling involve different risks
A standalone purchased option can expire worthless, losing its entire premium. An uncovered call seller can face theoretically unlimited loss. A short put has substantial downside if the underlying collapses. Receiving a premium does not remove the seller’s obligation.
The premium-at-risk description for a purchased option concerns the option position itself. Exercise can create a separate share position with funding requirements and continuing market exposure.
Before moving to complex strategies
Be able to identify each leg as a bought or sold call or put, its strike and expiry, the net premium, the exercise terms and the capital needed. Then examine outcomes across a range of prices, including a large adverse move. A payoff diagram at expiry does not describe every interim margin or assignment event.
Further reading: Options Industry Council: Options Basics; SEC: An Introduction to Options.
Educational information and hypothetical examples only. This article does not recommend an options transaction.
