An options contract gives the buyer the right — but not the obligation — to buy or sell 100 shares of stock (or another underlying asset) at a specified price, on or before a specified date. The buyer pays a premium for this right. The seller (writer) collects that premium and takes on the obligation to fulfill the contract if the buyer exercises it.

There are two types of options: calls and puts. Understanding these two contracts is the foundation of all options trading.

Call Options

A call option gives the buyer the right to buy 100 shares at the strike price before expiration. You buy a call when you expect the stock to rise above the strike price.

Example: Stock trading at $50. You buy a call with a $55 strike expiring in 30 days for a $2 premium ($200 total for 100 shares). If the stock rises to $65, you can buy 100 shares at $55 and immediately sell at $65 — a $10 per share gain minus the $2 premium = $8 profit per share ($800 total). If the stock stays below $55, the call expires worthless and you lose your $200 premium.

Maximum loss: The premium paid ($200). Maximum gain: Theoretically unlimited as the stock price rises.

Put Options

A put option gives the buyer the right to sell 100 shares at the strike price before expiration. You buy a put when you expect the stock to fall below the strike price, or to hedge an existing stock position.

Example: Stock at $50. You buy a put with a $45 strike for $1.50 premium ($150 total). If the stock falls to $35, you can sell 100 shares at $45 while they're worth $35 — a $10 per share gain minus the $1.50 premium = $8.50 profit per share ($850 total). If the stock stays above $45, the put expires worthless.

Maximum loss: The premium paid ($150). Maximum gain: Strike price minus premium (since a stock can only fall to zero).

Key Options Concepts

Strike price: The price at which the option contract allows you to buy (call) or sell (put). An option is "in the money" when exercise would be profitable: a $55 call is in the money when stock > $55; a $45 put is in the money when stock < $45.

Premium: The price you pay for the option. Made up of intrinsic value (how far in-the-money it is) and time value (the remaining time to expiration multiplied by implied volatility).

Expiration: The date after which the option can no longer be exercised. Most retail traders use options expiring 30–60 days out. Weekly options (expiring Friday) are available on high-volume stocks and indices.

Theta (time decay): Options lose value every day as expiration approaches — this is theta. A $2 option with 30 days to expiry loses roughly $0.067 in time value per day, all else equal. Buyers of options are fighting time decay; sellers benefit from it.

Implied volatility (IV): The market's expectation of future price movement, derived from the option price. High IV means expensive options (sellers benefit); low IV means cheap options (buyers benefit). IV typically spikes around earnings, FDA decisions, and macroeconomic events.

Breakeven at Expiration

For a long call: breakeven = Strike price + Premium paid. In the example above: $55 + $2 = $57. The stock must exceed $57 for the trade to profit.

For a long put: breakeven = Strike price − Premium paid: $45 − $1.50 = $43.50. The stock must fall below $43.50 for the trade to profit.

Use the Options Breakeven Calculator to find the exact breakeven for any call or put, and the Options Profit Calculator to model the P&L at any stock price at expiration.