Calls and Puts — Options Fundamentals
An option is a contract granting the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (strike price) on or before a specific date (expiration). Options are priced in premiums — the cost of the option contract, paid by the buyer to the seller. Each standard equity options contract represents 100 shares. A call option gives the buyer the right to buy the underlying stock at the strike price. Example: a call option on Apple (AAPL) with a $180 strike expiring in 90 days. If AAPL trades at $200 at expiration, the call is worth $20 per share ($20 × 100 shares = $2,000) — intrinsic value of $200 - $180 = $20. If AAPL trades at $175 at expiration, the call expires worthless — the buyer loses the entire premium paid. A call buyer profits when the stock rises above the strike price plus the premium paid. A put option gives the buyer the right to sell the underlying stock at the strike price. Example: a put option on AAPL with a $170 strike. If AAPL falls to $150 at expiration, the put is worth $20 ($170 - $150 = $20 per share). The put buyer profits when the stock falls below the strike price minus the premium. Options pricing is determined by intrinsic value (current stock price relative to strike) and time value (the remaining time until expiration — more time means more opportunity for favorable movement, so longer-dated options cost more). The Black-Scholes model formalizes options pricing using these inputs plus implied volatility.