# What an option is (Options 101, lesson 1 of 10)

Canonical URL: https://mrkts.gg/learn/options/what-is-an-option
Last updated: Nov 9, 2026, 9:00 AM ET

> What an option contract is, who has the right and who has the obligation, and why one contract covers 100 shares. A free lesson with examples.

What you'll be able to do: Define an option contract, who holds the right vs the obligation, the 100-share multiplier, strike, expiration, premium, and American vs European style.

## An option is a contract with a price tag

A stock trades at $50. For $30, you can buy a contract that lets you buy 100 shares at $55 at any time over the next 30 days. You don't have to use it.

If the stock stays at $50, you walk away and you're out $30. If it jumps to $60, your right to buy at $55 is worth real money. That contract is a call option.

> **Key idea:** The buyer of an option gets a right, never a duty. The price paid for that right is called the premium.

## Four words you need

- Strike: the fixed price written in the contract. Here, $55.
- Expiration: the last day the right exists.
- Premium: the price of the contract, quoted per share. A quote of 0.30 means 30 cents a share.
- Contract size: one standard US equity option covers 100 shares.

1. Read the quote: 0.30 a share.
2. Multiply by the 100 shares: 0.30 × 100 = $30.
3. That $30 is the most the buyer can lose.

A tiny option chain for a $50 stock with 30 days to expiration. Each row is a strike, with its call price and put price per share.

| Strike | Call | Put |
| --- | --- | --- |
| 45 | 5.22 | 0.22 |
| 50 | 1.72 | 1.72 |
| 55 | 0.30 | 5.30 |

## Calls and puts

| Call | Put |
| --- | --- |
| The right to buy 100 shares at the strike | The right to sell 100 shares at the strike |
| Gains when the stock rises | Gains when the stock falls |
| The seller must sell if assigned | The seller must buy if assigned |

The chart shows profit or loss at expiration for each stock price. This is the buyer of the 55 call from the last section. Between 55 and 55.30 the call is worth something, so you would exercise it, but you still lose money overall because you paid more than it returns.

*Payoff chart at expiration: long 55 call at 0.30. Per position: breakeven 55.30, max gain unlimited, max loss $30.* Long 55 call bought at 0.30, at expiration. Below 55 the most you lose is $30. Breakeven is 55.30.

## Two sides of every trade

| Buyer | Seller (also called the writer) |
| --- | --- |
| Pays the premium | Receives the premium |
| Has the right | Has the obligation |
| Can lose at most the premium | Can lose much more than the premium |

Why would anyone take the obligation? They're paid up front. The seller of the 55 call keeps the $30 if the stock stays below $55.

A put seller agrees to buy 100 shares at the strike if assigned. Sell a 25 put for 0.60 and the stock falls to $20: you buy $2,000 of stock for $2,500, less the $60 you collected. That's a $440 loss.

*Payoff chart at expiration: short 55 call at 0.30. Per position: breakeven 55.30, max gain $30, max loss unlimited.* Short 55 call sold at 0.30, at expiration. The most the seller can make is $30. Above 55.30 the seller starts to lose.

## An option isn't a share

An option is a contract about shares, not ownership. A call holder gets no vote and no dividends unless they exercise and take the shares.

> **Tip:** US stock and ETF options are American-style, so you can exercise on any business day before expiration. Standard SPX index options are European-style: exercise only at expiration, settled in cash.

## Worked example: One call, both sides

*Illustrative numbers, not real quotes.*

Stock XYZ is at $50. The XYZ 55 call, expiring in 30 days, is quoted at 0.30.

- The buyer pays 0.30 × 100 = $30 and gets the right to buy 100 XYZ at $55 until expiration.
- The seller receives $30 and must sell 100 XYZ at $55 if assigned.
- Both sides know their numbers on day one: the buyer can lose at most $30, and the seller can make at most $30.

Here is what each side has at expiration, per contract, for different XYZ prices:

| XYZ at expiration | Call is worth | Buyer P&L | Seller P&L |
| --- | --- | --- | --- |
| $50 | $0 | −$30 | +$30 |
| $55 | $0 | −$30 | +$30 |
| $55.30 | $30 | $0 | $0 |
| $58 | $300 | +$270 | −$270 |
| $60 | $500 | +$470 | −$470 |

- At $55.30 the buyer breaks even: the call is worth the $30 paid.
- Above that, the seller loses what the buyer gains. A seller who doesn't own the shares can lose more if the stock keeps climbing.

## Practice

The page has 7 practice questions and 5 mastery checks for this lesson, with feedback on each wrong answer: https://mrkts.gg/learn/options/what-is-an-option

Next lesson: [Calls vs puts](https://mrkts.gg/learn/options/calls-and-puts.md)

Education only, not investment advice. Example numbers are illustrative, not real quotes.

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