Option Contract
What an options contract is and how it gives you the right to buy or sell.
An options contract is a financial agreement that gives the buyer the right — but not the obligation — to buy or sell an underlying asset at a specific price before or on a specific date. The seller (writer) of the contract takes on the obligation to fulfill the terms if the buyer chooses to exercise.
Every options contract controls 100 shares of the underlying stock. There are two types: call options give the right to buy, and put options give the right to sell.
Why It Matters
Options contracts are the foundation of everything in options trading. Without understanding what you are actually buying or selling, every strategy, every Greek, and every risk metric is meaningless. The contract structure — 100 shares per contract, defined expiration, set strike price — determines how options behave, how they are priced, and how much capital you need.
Understanding contracts also prevents costly mistakes. New traders sometimes buy 10 contracts thinking they are getting exposure to 10 shares. They are actually controlling 1,000 shares. That misunderstanding alone can turn a small trade into a significant position.
How It Works
When you buy a call option, you pay a premium to the seller. In return, you get the right to purchase 100 shares at the strike price any time before expiration. If the stock rises above the strike, your call gains value. If it doesn't, you lose the premium you paid — nothing more.
When you buy a put option, you pay a premium for the right to sell 100 shares at the strike price. If the stock drops below the strike, your put gains value.
Sellers (writers) collect the premium upfront but take on obligation. A call seller must sell shares at the strike if assigned. A put seller must buy shares at the strike if assigned.
The four basic positions are:
- Long call — Right to buy. Bullish bet. Max loss = premium paid.
- Long put — Right to sell. Bearish bet. Max loss = premium paid.
- Short call — Obligation to sell. Bearish/neutral bet. Risk can be unlimited if uncovered.
- Short put — Obligation to buy. Bullish/neutral bet. Risk is substantial (stock can fall to zero).
Quick Example
Stock XYZ trades at $50. You buy one XYZ $55 call expiring in 30 days for $1.50 per share. Your total cost is $150 (1 contract x 100 shares x $1.50). If XYZ rises to $60 before expiration, your call is worth at least $5.00 per share ($500 total). Your profit: $350. If XYZ stays below $55, the contract expires worthless and you lose $150.