Understand how stock options work: the right a call or put provides, the premium paid, and the difference between intrinsic value and profit.
Start with the option payoff
A stock call gives its buyer the right to buy shares at the strike price; a stock put gives the right to sell shares at that price. A standard U.S. equity option usually covers 100 shares, though adjusted contracts can differ.
The buyer pays a premium for the right; the seller accepts the corresponding obligation. Strike, premium and expiration together determine whether a favorable price movement produces a profit.
A 100-share example
Assume a hypothetical stock option with a USD 100 strike and a USD 5-per-share premium. A standard 100-share contract costs USD 500. The following call and put examples use the same premium to show the arithmetic.
Buying stock calls
A call gives its buyer upside exposure to the specified underlying. For this example, use a strike of 100 USD per share and a premium of 5 USD per share. With the stated multiplier of 100, the premium cost is USD 500.
At expiration with the underlying at 112, intrinsic value is (112 − 100) × 100 = USD 1,200. After the premium, the gain is USD 700 before other costs.
At or below the strike, the call has no intrinsic value and loses its whole premium. Breakeven at expiration is 105 USD per share. At 102.5, the call is in the money but still loses USD 250 after the premium.
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Buying stock puts
A put gives its buyer downside exposure. Assume the same 100 strike and 5-unit premium, costing USD 500 with the same multiplier. The equal call and put premiums are hypothetical, not a claim about actual market quotes.
At expiration with the underlying at 88, intrinsic value is (100 − 88) × 100 = USD 1,200. Subtracting the premium leaves USD 700 before costs.
At or above the strike, the put loses its full premium. Its breakeven is 95 USD per share. At 97.5, it is in the money but still loses USD 250 after the premium. Before expiration, time and implied volatility also affect the price; these expiry calculations do not predict its resale value.
What the examples do not show
A correct price view does not guarantee a profit. The move must be large enough and arrive before expiry to recover the premium. Before expiry, time remaining and implied volatility affect the price available when selling to close.
The premium limits the standalone purchased option’s loss. Exercise can create another position requiring funding or margin, and keeping that position introduces further risk. An uncovered seller can lose much more than the premium received.
Choose your next lesson
Call Option — Continue with the focused explanation and examples.
Put Option — Continue with the focused explanation and examples.
Option Exercise & Assignment — Continue with the focused explanation and examples.
Options Premium — Continue with the focused explanation and examples.
Understand the contract terms
The strike price is the agreed share price. The premium is what the buyer pays for the option, and the expiration date limits the life of that right.
Read exercise and assignment before holding through expiry: exercising or being assigned can create a stock position and a funding obligation.
Put your options knowledge to work
Practice the ideas in this guide with a 20-question options quiz. Start at Beginner and work through five levels, with explanations after every test.
