Most people who lose money in options never learned what the contract actually promises. They buy something called a call because a stock is supposed to go up, and find out afterwards what they paid for and what could go wrong. This lesson fixes that. By the end of it you will be able to read a live options chain and say, for any row, what the buyer owns, what the seller owes, and roughly what the price is made of.
Two contracts, two rights
An option is a contract that gives its owner a choice and gives the other party an obligation. A call is the right to buy a stock at a fixed price, called the strike, at any time up to a fixed date, called the expiration. A put is the right to sell at the strike up to expiration. The owner can use the right, which is called exercising, or let it lapse. Nobody can make the owner do anything.
Most US stock and ETF options are American style: the owner can exercise on any trading day up to expiration. Index options such as SPX are European style and can only be exercised at expiration. In practice owners rarely exercise early, because selling the option usually returns more than exercising it, for reasons Module 10 explains.
Every option has a buyer and a seller. The buyer pays a price up front, called the premium, and gets the right. The seller collects the premium and takes on the obligation: if the buyer exercises, the seller must deliver the shares for a call, or take the shares for a put, at the strike. The most a buyer can lose is the premium. The seller's loss can be far larger, which is exactly why the seller is paid.
One contract is one hundred shares
US stock options are quoted per share, but each contract covers 100 shares. A call quoted at $2.40 costs $240. Say a stock is at $150 and you buy the $155 call for $2.40. You have paid $240 for the right to buy 100 shares at $155 up to expiration. If the stock finishes at $160, that right is worth $5 a share, $500 a contract, and you made $260. If the stock finishes at $154, the right is worth nothing and you lost $240. The seller's result is the mirror image.
What the right is worth at expiration
At expiration the choice becomes simple arithmetic. The call owner exercises only if the stock is above the strike, and then the right is worth the difference. The put owner exercises only if the stock is below the strike. Everywhere else the right is worth nothing, never less. The chart shows that value for three strikes on a $100 stock. Flip it to puts and the lines face the other way.
Value per share at expiration against the stock price, for three strikes on a $100 stock. Hover to read any point, then switch to Put and watch the lines face the other way.
Two things stand out. The value never drops below zero, because an owner who would lose by exercising simply walks away. And the lower the strike, the more a call is worth at every stock price, which is why calls get cheaper as you read down the chain and puts get dearer.
The other side of the trade
Options are not issued by the company. A new contract comes into being when a buyer and a seller agree on a price, and a clearing house stands between them so that neither has to trust the other. Whatever the buyer makes, the seller loses, and the other way round. Before trading costs, the two results always add to zero.
So the seller has to be paid to take the other side, and the premium is that payment. The seller of an out-of-the-money call collects cash up front and keeps all of it if the stock stays below the strike. What they give up is the large move. The chart below is the seller's side of a $105 call on a $100 stock with 30 days left: a small gain across most of the chart, and a loss that keeps growing on the right.
Profit or loss per contract for selling a $105 call on a $100 stock with 30 days left. The gain is capped at the premium collected; the loss has no floor. Drag days toward 1 and watch today's line settle onto the expiry line.
That shape is why option sellers are paid, and why you should know which side of it you are on before you place a trade. Buyers pay for protection or for a cheap bet on a big move. Sellers are paid to carry a risk that someone else does not want.
Reading a chain
The options chain is the price list. It shows every strike for one expiration, one row per strike, with calls on the left, puts on the right and the Strike running down the middle. The row nearest the stock price is at the money. A call with a strike below the stock price is in the money, because the right to buy below the market is already worth something today. A call with a strike above the stock price is out of the money. For puts it is the other way round: a put is in the money when its strike is above the stock price.
Look at the Mid column on each side. That is the price, halfway between what buyers are bidding and what sellers are asking. Read down the call side and the Mid falls as the strike rises, because the right to buy at a higher price is worth less. Read down the put side and it rises. The M% column tells you how far each strike sits from the stock price, as a percentage, so you never have to work it out in your head.
The maths: value and profit at expiration
Write S for the stock price at expiration and K for the strike. The value of each right at expiration is:
- Call:
max(S - K, 0) - Put:
max(K - S, 0)
max(a, 0) means "a, or zero if a is negative", which is the walk-away choice written as a formula. The buyer's profit per contract is 100 times the value minus the premium: 100 × (max(S - K, 0) - C) for a call bought at C. The seller's profit is the same number with the sign flipped.
Worked example, from the lesson: the $155 call bought at $2.40, with the stock finishing at $160. The value is max(160 - 155, 0) = $5, and the profit is 100 × (5 - 2.40) = $260. The seller's result is minus $260. With the stock at $154, the value is max(-1, 0) = 0 and the buyer's profit is 100 × (0 - 2.40) = minus $240, which is the seller's plus $240.
Your turn
Open the AAPL chain in the Terminal. Find the stock price in the quote bar, then find the highlighted at-the-money row and read its strike. Then read what that at-the-money call costs. The questions below are checked against the live market, so the answer is whatever the chain says right now.