Call and put options
What a call and a put are: strike, expiration and premium, why one US equity contract is 100 shares, and why a long option can only lose what you paid.
The contract
A listed equity option is a contract. It is the right to buy or sell 100 shares at a fixed price, the strike, until a fixed day, expiration. You pay a premium for that right. After expiration the contract is gone, used or not.
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The premium is quoted per share, then multiplied by 100. A call quoted at $2.40 costs $240 for one contract, before fees. Four of them cost $960. A quote that looks cheap on the chain is a real debit in the account.
Calls and puts
A call is the right to buy shares at the strike. A put is the right to sell shares at the strike. A long call is a bet the stock rises. A long put is a bet it falls, or insurance on shares you already hold.
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You do not have to use the right. If the trade is a bad one at expiration, you let the contract die and the premium is the loss. Using the right is called exercise. Most listed options are sold to someone else before that day, not exercised.
Long and short
Long means you bought the contract: you hold the right, and the most you can lose is the premium. Short means you sold it, collected the premium, and may be forced to trade the shares. That force is called assignment.
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A YOLO, in the chat, is a bet sized so that going to zero feels like the plan. The contract does not know the plan. A long option can still expire worthless. A short option can lose far more than the premium you were paid.
Not a mini share
A call is not a tiny share, and a small premium is not a small loss you only take if you are unlucky. The premium can go to zero. Shares have no expiration date. The contract does, and the clock is part of the price.
Key terms
- Call option
- The right to buy 100 shares at the strike, until expiration. A bet the stock rises, if you are long.
- Put option
- The right to sell 100 shares at the strike, until expiration. A bet the stock falls, or insurance on shares you own.
- Strike price
- The fixed price in the contract. The call buys there; the put sells there.
- Option premium
- The price of the option, quoted per share. One contract multiplies it by 100.
- Assignment
- When a short option is exercised against you, you must trade the shares at the strike.
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