What Are Options? Call, Put, Strike Price Explained Simply

By Harper Banks | valueofstock.com

---

Disclaimer: This article is for educational purposes only and is not financial advice. Options involve significant risk and are not suitable for all investors. Consult a licensed financial advisor before trading options.

---

If you follow the stock market, you've heard "options" thrown around — on financial news, in investing forums, from fellow investors. Options sound complex. Wall Street loves complexity. But the core idea is simpler than the jargon suggests, and if you understand how stocks work, you're more than halfway there.

---

Options Are Contracts, Not Shares

The first thing to understand: when you buy an option, you are not buying a share of stock. You are buying a contract — a legal agreement that gives you the right to buy or sell 100 shares of a stock at a specific price, before a specific date.

A contract. Not ownership. No dividends, no voting rights, and unlike stocks, a hard expiration date.

Each standard options contract controls exactly 100 shares — even though the option itself costs far less than buying 100 shares outright. That's what makes options powerful, and also what makes them risky.

---

The Two Types of Options: Calls and Puts

There are only two fundamental types of options. Everything else is a variation.

Call Options: The Right to BUY

A call option gives you the right — but not the obligation — to buy 100 shares of a stock at a specific price before the contract expires.

You buy a call when you think the stock is going up.

Here's a plain-English example:

Imagine you believe Apple (AAPL) stock, currently trading at $185, is going to climb over the next few months. You buy a call option with a strike price of $180, expiring in 90 days.

What does that mean? You now have the right to buy 100 shares of Apple at $180 per share — no matter what the market price does. If Apple rises to $200, you can still buy at $180 and immediately see a paper gain of $20 per share ($2,000 total) on your option position.

Put Options: The Right to SELL

A put option gives you the right — but not the obligation — to sell 100 shares of a stock at a specific price before the contract expires.

You buy a put when you think the stock is going down — or when you want to protect shares you already own.

If Apple is trading at $185 and you own 100 shares, you might buy a put with a strike price of $175. If Apple falls to $160, you can still sell your 100 shares at $175 using the put. It's like buying insurance on your position.

---

The Three Numbers You Need to Know

Every option has three defining characteristics. You'll see these on any options chain (the table of available contracts for a given stock):

1. Strike Price

The strike price is the price at which you can buy (call) or sell (put) the shares if you exercise the option. It's the "agreed price" baked into the contract.

In our Apple example, $180 is the strike price. It doesn't change, no matter what the market does.

2. Expiration Date

Options don't last forever. Every contract has an expiration date — the last day you can exercise it or sell it. After that, it's worthless if you haven't acted.

Options expire on specific dates — typically the third Friday of each month for monthly contracts. There are also weekly options (expiring every Friday) and longer-dated options called LEAPs (which can expire a year or more away).

The closer you get to expiration, the more urgency matters. Time is always working against the option buyer (more on that in the Greeks article in this series).

3. Premium

The premium is what you actually pay for the option contract. It's the price of the contract itself — not the underlying stock.

If an Apple call option costs $3.50 per share in premium, and each contract controls 100 shares, you'd pay $350 total for one contract (plus broker commissions).

The premium is what the seller receives for taking on the obligation the option creates. If you buy the option and it expires worthless, you lose the entire premium. That's your maximum loss as an option buyer.

---

In-the-Money vs. Out-of-the-Money

These phrases simply describe whether an option has value if exercised right now.

In-the-money (ITM): A call is in-the-money when the stock price is above the strike. A put is in-the-money when the stock price is below the strike. That "real" advantage is called intrinsic value.

Apple at $185, $180 call → in-the-money by $5. The option has $5 of intrinsic value.

Out-of-the-money (OTM): A call is out-of-the-money when the stock price is below the strike. These are cheaper (lower premiums) because they're less likely to pay off — the "lottery tickets" of options. Higher probability of expiring worthless.

Apple at $185, $190 call → out-of-the-money. No reason to buy at $190 when the market price is $185.

At-the-money (ATM): When the stock is right at the strike price. These tend to carry the most time value and the highest sensitivity to price moves.

---

A Real Example: Apple Call Option

• Stock: Apple (AAPL), trading at $185 per share
• Option: Call with $180 strike, expiring in 60 days
• Premium: $8.00 per share → $800 total for one contract

Scenario A — Apple rises to $200: Your option has $20 of intrinsic value ($200 − $180). It might be worth $20+/share → $2,000+. You paid $800. Profit: ~$1,200.

Scenario B — Apple stays at $185: With time running out, the option may be worth ~$5–6/share at expiration. You paid $800. Loss: ~$200–300.

Scenario C — Apple falls to $170: Your $180 call is out-of-the-money. It expires worthless. You lose the full $800 premium — your maximum possible loss.

Your maximum loss is always capped at the premium paid. You can't lose more than $800, and you won't owe anything if it expires worthless. This limited downside is one of the core features of buying options.

---

Why Do People Buy and Sell Options?

Buyers use options primarily for leverage and hedging. With $800, you controlled $18,500 worth of Apple stock. That leverage cuts both ways — small moves create large percentage swings in the option's value. Investors also buy put options as insurance, protecting shares they already own against a crash.

Sellers collect the premium immediately in exchange for an obligation. If you sell a call, you must sell shares at the strike if exercised. If you sell a put, you must buy shares at the strike. Sellers make money when options expire worthless — keeping the premium as profit. This is the basis of strategies like covered calls and cash-secured puts, covered in the next articles in this series.

---

What Options Are NOT

• Not stock ownership. No dividends, no voting rights — just a contractual right.
• Not unlimited risk for buyers. Your maximum loss is the premium paid.
• Not a timing-free trade. Even if you're right about direction, being wrong on timing costs you. Options expire.
• Not reliably profitable for most buyers. Most options held to expiration expire worthless. That's why selling options for income is often more consistent than buying them for speculation.

---

The Value Investor's Connection

Benjamin Graham built wealth by understanding exactly what he was buying at what price. Options fit that philosophy in specific, disciplined ways. Used thoughtfully, they let value investors:

1. Generate income on stocks already owned (covered calls)
2. Get paid to wait to buy a stock at a target price (cash-secured puts)
3. Protect portfolio value during uncertain markets (protective puts)

In the rest of this series, we'll walk through each of those strategies step by step.

---

Key Takeaways

• An option is a contract giving you the right (not obligation) to buy or sell 100 shares at a set price before a set date
• Calls = right to BUY → profit when stock rises
• Puts = right to SELL → profit when stock falls, or to protect existing shares
• Strike price = the agreed price; Premium = what you pay or collect; Expiration = the deadline
• In-the-money = has intrinsic value; Out-of-the-money = no intrinsic value, only time value
• Buyers: limited downside (premium paid), leveraged upside
• Sellers: keep the premium, take on obligations — the basis for income strategies

---

Next in this series: Covered Calls: The Safest Options Strategy for Income

Harper Banks writes about value investing and personal finance at valueofstock.com. This content is educational only. Options trading involves substantial risk of loss. Always consult a qualified financial advisor before making investment decisions.