Options 101
The essential mechanics every options learner should understand.
What is an option?
An option is a contract whose value is connected to an underlying asset. A call generally gives its holder the right to buy shares at a strike price before or at expiration, while a put generally gives its holder the right to sell. Contract terms, exercise style, and settlement can vary.
Core vocabulary
- Strike price: The contract price at which exercise occurs.
- Expiration: The date after which the contract no longer exists.
- Premium: The price paid by a buyer and received by a seller.
- Intrinsic value: The amount an option is in the money.
- Extrinsic value: The portion associated with time, volatility, and other pricing inputs.
Next lessons
Read the launch articles on calls and puts, options chains, expiration, assignment, implied volatility, and the Greeks. Then compare the long call, long put, covered call, cash-secured put, and vertical spread guides.