What Are Options? Contracts, Rights, and Obligations

An option is a listed contract tied to a stock (or another underlying). It gives the holder a choice, not a requirement, to buy or sell shares at a fixed strike price before a fixed expiration date. That choice has value, which is why buyers pay a premium and sellers often collect one.

Options are not shares. You do not own the company when you buy a call. You own a contract with rules. Those rules matter because they define your best case, your worst case (often, but not always, capped), and what happens on the last day the contract is alive.

Rights for buyers, obligations for sellers

When you buy an option, you pay premium upfront. In return you get a right:

• A call is the right to buy stock at the strike.
• A put is the right to sell stock at the strike.

You may exercise that right, or you may sell the contract back on the exchange before expiration. If the option expires out of the money, it usually becomes worthless and you lose the premium you paid.

When you sell (write) an option, you collect premium but take on an obligation. If the buyer exercises, you must deliver shares (short call) or buy shares (short put) at the strike, subject to margin and account rules. Selling can define risk in some strategies, but naked short options can carry large or even uncapped risk. Beginners should learn buyer mechanics first.

Core terms on every chain

Strike price is the price in the contract where the buy or sell would happen if you exercise.

Expiration is the last day the option is active for standard U.S. equity options (often a Friday). After that, the contract ceases to exist.

Premium is the price of the option per share. One equity option contract controls 100 shares, so a $2.00 premium is $200 per contract before fees. See Options contract multiplier.

American-style equity options can be exercised before expiration in many cases. European-style index options often allow exercise only at expiration. Details vary by product.

How options differ from stock

Stock has delta near +1 per share: if the stock rises $1, your position rises about $1 per share (ignoring dividends and fees). A long call has positive delta but usually less than 1, and that sensitivity changes as price and time move. Read Delta explained.

Stock does not expire. Options do. As expiration approaches, time value shrinks. That erosion is tied to theta. See Expiration and time decay and Theta explained.

Stock prices do not embed a separate "volatility" line item. Option premiums do, through implied volatility. When IV rises, options often get more expensive even if the stock is flat. See Implied volatility basics and Vega explained.

Why people use options

Traders and investors use options for different reasons:

• Direction with a defined premium risk on long options.
• Hedging stock they already own (for example, a protective put).
• Income strategies that sell premium with rules (for example, covered calls).
• Defined-risk spreads that combine multiple legs.

None of these goals removes risk. Options change the shape of profit and loss. Payoff charts make that shape visible. Start with How to read an options payoff chart, then explore Greeks in the builder.

Worked example 1: long call buyer

Suppose ABC trades at $100. You buy one $105 call expiring in six weeks for $3.00 per share ($300 per contract).

• Max loss: $300 if ABC finishes at or below $105 at expiration (option expires worthless).
• Breakeven at expiration: $105 strike + $3 premium = $108 per share on the stock.
• If ABC is $115 at expiration, intrinsic value is $115 − $105 = $10 per share ($1,000). Minus $300 premium, profit is about $700 before fees.

Before expiration, the option price also includes extrinsic value. If ABC stays at $100, the call can still lose value from theta even though you were "right" that you did not need to exercise yet.

Worked example 2: long put as insurance

You own 100 shares of ABC at $100 and buy one $95 put for $2.00 ($200 total).

• If ABC falls to $80 at expiration, the put is worth about $15 per share ($1,500). Stock lost $2,000; put gain offsets part of that (minus the $200 premium).
• If ABC stays at $110, the put expires worthless. You keep the stock and lose the $200 premium, similar to an insurance deductible.

The put's delta is negative: it tends to gain when the stock falls. Combined with long stock (+100 delta on 100 shares), net delta falls, which is the point of hedging.

Calls and puts in one place

Role	Call	Put
Buyer pays	Premium	Premium
Buyer gets	Right to buy at strike	Right to sell at strike
Typical directional view	Bullish	Bearish or hedge
Seller receives	Premium	Premium
Seller risk	Obligation if assigned	Obligation if assigned

Go deeper in Call options explained and Put options explained.

Reading the market before you trade

An options chain lists strikes, bids, asks, volume, and open interest for each expiration. How to read an options chain walks through the table. Strike price and moneyness explains ITM, ATM, and OTM labels.

Common beginner mistakes

• Confusing premium with strike (you pay premium; strike is where buy/sell happens if you exercise).
• Forgetting the 100-share multiplier when sizing P/L.
• Selling options without understanding assignment and margin.
• Holding long options through earnings without noticing elevated IV (premium can shrink after the event even if direction is right).

Next steps in ThetaViz

Model a simple long call in the builder. Toggle Greek overlays via Greeks in the builder. Compare stock P/L with Long stock payoff to see how options reshape risk.

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ThetaViz provides educational tools only. This guide is not investment, tax, or legal advice. Prices, margin requirements, and tax rules change. Confirm details with your broker and qualified professionals before trading.