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

What Are Options?

An option is a contract that gives the buyer the right -- but not the obligation -- to buy or sell 100 shares of a stock at a specific price, by a specific date. The seller (that's us in the wheel) takes on the obligation and gets paid cash upfront called the premium. Think of it like selling insurance -- you collect the payment now and only owe something if a specific event happens.

Call Options

A call gives the buyer the right to buy 100 shares at the strike price. People buy calls when they think a stock is going up. In the wheel, we sell covered calls -- meaning we already own the shares and we're saying, 'Sure, I'll sell them at this price if the stock gets there.' We collect premium either way.

Call Option Example
You own 100 shares of AAPL at $195. You sell a $200 call expiring in 30 days for $4.00. That's $400 cash in your account today. If AAPL stays under $200, you keep the $400 and your shares. If AAPL rips to $210, your shares get called away at $200 -- you still made $4 premium + $5 stock gain = $9/share profit. Not a bad 'problem' to have.

Put Options

A put gives the buyer the right to sell 100 shares at the strike price. People buy puts when they think a stock is going down. In the wheel, we start by selling cash-secured puts -- basically saying, 'I'd love to buy this stock at a lower price, and I'll take cash now for making that promise.'

Put Option Example
MSFT is at $390. You sell a $380 put expiring in 30 days for $6.00. That's $600 in your pocket. You need $38,000 in cash set aside as collateral. If MSFT stays above $380, you keep the $600 free and clear -- that's a 1.6% return in 30 days. If MSFT drops to $370, you buy 100 shares at $380, but your real cost is $374 after the premium. Either way, you got paid.
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 getting assigned shares
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 at a discount
Contract Multiplier
Every option contract covers 100 shares. When you see a premium quoted at $3.50, you're actually collecting $3.50 x 100 = $350. This trips people up early on. Always multiply by 100.
The short version
  • •Options are contracts -- the buyer gets a right, the seller gets an obligation plus cash upfront.
  • •Calls = right to buy. Puts = right to sell. Each contract = 100 shares.
  • •The wheel strategy is all about selling puts and covered calls to collect premium income.
  • •You don't need to predict direction perfectly. You just need to pick good stocks at good prices.
Quick Check
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What does a put option give the buyer the right to do?

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