Learn the stock market › Options › Lesson 1 of 9
What is an option?
A right with a price
An option is tied to an underlying stock, but buying the option does not make you an owner of that stock. You only hold the right to do the deal if it pays, and you can walk away if it does not.
The terms are fixed at the start: which stock, at what price, and until which day. The price is the strike and the last day is the expiry. What the buyer pays for the right is the premium.
Two kinds
A call is the right to buy the stock at the strike. It gains value when the stock rises.
A put is the right to sell the stock at the strike. It gains value when the stock falls.
A US stock option contract generally covers 100 shares, and the premium is quoted per share. A premium of $5 therefore means $500 for one contract.
Option or stock, in numbers
An example with round prices. The stock is at $100. You can buy 100 shares for $10,000, or one call contract with a $100 strike for $500. This is how each ends at expiry:
| Price at expiry | 100 shares | One call contract |
|---|---|---|
| $70 | −$3,000 | −$500 |
| $90 | −$1,000 | −$500 |
| $100 | $0 | −$500 |
| $110 | +$1,000 | +$500 |
| $130 | +$3,000 | +$2,500 |
The option costs a twentieth as much, and on a large rise it earns almost the same. But if the stock goes nowhere, the whole premium is gone while the shareholder has lost nothing. A stock has no last day either.
On the other side of the deal is the writer of the option. How much a writer can lose is in the lesson on losses.
Test yourself
You bought a call and the stock falls hard. What do you have to do?
Sources
- US Securities and Exchange Commission, An Introduction to Options, updated July 16, 2026: a contract generally represents 100 shares.