Learn the stock market › Options › Lesson 2 of 9
How do options work?
Two sides
The person who buys an option is the buyer or holder. The person who sells a new one is the writer. The premium goes from buyer to writer, and in return the writer takes on a duty: to sell the stock at the strike if it is a call, or to buy it if it is a put. The premium is paid up front and does not come back.
Three ways it ends
The position is closed. Options trade throughout their life. A buyer can sell at today's price, and a writer can buy back. The position is then gone without any shares changing hands.
The option is exercised. The buyer uses the right. A US stock option can be exercised at any time up to expiry, which is called American style. A European-style option can only be exercised on its expiry date. When a holder exercises, a writer receives a notice called an assignment and must fulfil the duty.
The option expires. If exercising does not pay, the option ends worthless. The buyer has lost the premium and the writer keeps it.
How the value changes along the way
Here is a call with a $100 strike, worked out with a model for different prices and different amounts of time left. The example has round prices and a volatility of 25%.
| Time left | Stock at $90 | Stock at $100 | Stock at $110 |
|---|---|---|---|
| 6 months | $2.84 | $7.04 | $13.44 |
| 3 months | $1.32 | $4.98 | $11.68 |
| 1 month | $0.22 | $2.88 | $10.33 |
| At expiry | $0.00 | $0.00 | $10.00 |
With the price unchanged at $100, the value falls from $7.04 with six months left to $2.88 with one month left, and at expiry it is zero. So a buyer can lose money even if the stock stands still. What sets the price has its own lesson.
Test yourself
You bought an option two months ago and no longer want it. What can you do?
Sources
- US Securities and Exchange Commission, An Introduction to Options, updated July 16, 2026: the premium, exercise and assignment.
- Options Industry Council, Basics, read November 5, 2026: American and European style.