Learn/Options Fundamentals/Lesson 1
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What Are Options? (Calls & Puts)

What Are Options?

An option is a financial contract that gives the buyer the right -- but not the obligation -- to buy or sell an underlying asset (usually 100 shares of stock) at a specific price, on or before a specific date. The seller (writer) of the option takes on the corresponding obligation in exchange for receiving a cash payment called the premium.

Call Options

A call option gives the holder the right to buy 100 shares of the underlying stock at the strike price before expiration. Buyers purchase calls when they expect the stock price to rise. For the wheel strategy, you will primarily be selling covered calls -- meaning you already own the shares and are willing to sell them at the strike price if assigned.

Call Option Example
You sell a AAPL $200 call expiring in 30 days for $4.00 premium. You collect $400 (since each contract covers 100 shares). If AAPL stays below $200 at expiration, you keep the premium and your shares. If AAPL rises above $200, you may be assigned and must sell your 100 shares at $200 each.

Put Options

A put option gives the holder the right to sell 100 shares of the underlying stock at the strike price before expiration. Buyers purchase puts when they expect the stock price to fall. In the wheel strategy, you begin by selling cash-secured puts on stocks you would be happy to own at a lower price.

Put Option Example
You sell a MSFT $380 put expiring in 30 days for $6.00 premium. You collect $600 and must keep $38,000 in cash as collateral. If MSFT stays above $380, you keep the premium free and clear. If MSFT drops below $380, you may be assigned and must buy 100 shares at $380 each.
Call Options
  • +Right to BUY at the strike price
  • +Buyer profits when stock rises
  • +Seller profits when stock stays flat or falls
  • +Wheel traders sell covered calls after assignment
Put Options
  • –Right to SELL at the strike price
  • –Buyer profits when stock falls
  • –Seller profits when stock stays flat or rises
  • –Wheel traders sell cash-secured puts to enter positions
Contract Multiplier
Each standard equity option contract represents 100 shares. When you see a premium quoted at $3.50, the actual cash exchanged is $3.50 x 100 = $350 per contract.
Key Takeaways
  • •Options are contracts giving the buyer a right (not obligation) to buy or sell shares at a set price before a set date.
  • •Calls = right to buy; Puts = right to sell.
  • •Each contract covers 100 shares of the underlying stock.
  • •The wheel strategy revolves around selling puts and covered calls to collect premium income.
Quick Check
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What does a put option give the buyer the right to do?

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