Calls And Puts Explained - Academy

The contract components

An option is a contract linked to an underlying asset such as a stock or ETF. Every contract has a strike price, an expiration date, and a premium.

The strike is the price where shares may be bought or sold if the option is exercised. The expiration date is when the contract ends. The premium is the price paid by the buyer and received by the seller.

Rights versus obligations

A call buyer has the right, but not the obligation, to buy shares at the strike.
A put buyer has the right, but not the obligation, to sell shares at the strike.
A call seller may have to sell shares at the strike.
A put seller may have to buy shares at the strike.

Vocabulary used in the next lessons

Contract size: a standard equity option normally covers 100 shares. A $1 quoted premium means $100 per contract; adjusted contracts can differ.
DTE: calendar days remaining until expiration.
Bid and ask: quoted buying and selling prices; their difference is the spread. A quote is not a guaranteed fill.
Volume: contracts traded in a session. Open interest: outstanding contracts at the observation time. Neither alone proves easy execution.
Delta: modeled option-price change for a $1 underlying move, with other inputs held constant. It is not the seller’s assignment probability.
Intrinsic value: max(stock price − strike, 0) for a call; max(strike − stock price, 0) for a put. Extrinsic value is the remaining option price.

Call and put obligations Hypothetical

An investor sells a $55 call and a different investor sells a $45 put on the same stock.

The call seller may have to sell shares at $55 if assigned.
The put seller may have to buy shares at $45 if assigned.
Both sellers received premium because they accepted obligations.

The direction of the obligation is what separates covered call planning from CSP planning.

Common misconception

Myth: The option seller only needs to know whether the option expires in the money.
Reality: The seller also needs to understand liquidity, early assignment possibility, breakeven, event risk, and whether the resulting stock position fits the plan.