Section 5.1 — Overview of Options

  • 🧩 What is an Option?

    • An option is a contract between two parties: a buyer and a seller (writer).

    • It gives the buyer the right, but not the obligation, to buy or sell a specific security at a set price (the strike price) before a set date (expiration).

    • Options are derivative securities — their value is derived from the price of an underlying asset (like a stock).

1. ⚖️ Types of Options:

  • Call Option: Right to buy the underlying security at the strike price.

  • Put Option: Right to sell the underlying security at the strike price.

2. 🏛 Regulator:

  • The Options Clearing Corporation (OCC) regulates and standardizes all exchange-traded option contracts — ensuring they’re easily tradable.

🧮 Key Terms

Term / Meaning

  • Strike Price / The price at which the underlying security can be bought or sold.

  • Expiration / Date the contract ends (standard options expire on the third Friday of the month at 11:59 PM).

  • Premium / Price of the option (paid by the buyer, received by the seller).

  • Contract Size / 1 contract = 100 shares of the underlying security.

  • Underlying Security / The stock or asset the option is based on.

🧍‍♂️ The Buyer (“Long,” “Holder,” or “Owner”):

  • Pays the premium.

  • Has rights (not obligations).

  • Can exercise the contract (buy or sell depending on call or put).

  • Will only exercise when it’s profitable (makes economic sense).

  • Opening Buy: When a buyer first purchases the contract.

  • Closing Sale: When the buyer sells the contract later.

🧍‍♀️ The Seller (“Short” or “Writer”):

  • Receives the premium.

  • Has an obligation if the buyer exercises.

  • Opening Sale: When the seller writes the contract.

  • Closing Purchase: When the seller buys it back to close their position.

Options

〰️

Options 〰️

💰 Call Contracts:

  • Buyer of a Call:

    • Right: To buy the stock at the strike price.

    • Goal: Wants the stock price to rise.

    • Market View: Bullish.

  • Seller (Writer) of a Call:

    • Obligation: To sell the stock at the strike price if exercised.

    • Goal: Wants stock to stay the same or fall.

    • Market View: Bearish.

📉 Put Contracts:

  • Buyer of a Put:

    • Right: To sell the stock at the strike price.

    • Goal: Wants the stock price to fall.

    • Market View: Bearish.

  • Seller (Writer) of a Put:

    • Obligation: To buy the stock at the strike price if exercised.

    • Goal: Wants stock to stay the same or rise.

    • Market View: Bullish.

📊 Summary Chart

Position / Contract Type / Market View / Rights or Obligation / Action

  • Long (Buyer) / Call / Bullish / Right to Buy / Expects price ↑

  • Long (Buyer) / Put / Bearish / Right to Sell / Expects price ↓

  • Short (Seller) / Call / Bearish / Obligation to Sell / Expects price ↓ or flat

  • Short (Seller) / Put / Bullish / Obligation to Buy / Expects price ↑ or flat

💬 Example Quote

  • L 2 XYZ JAN 60 Call @3

    • L: Long (buyer)

    • 2: Number of contracts

    • XYZ: Stock ticker

    • JAN: Expiration month

    • 60: Strike price

    • Call: Type of option

    • @3: Premium per share ($3 × 100 shares = $300 per contract)

Next Section

✺ Review questions ✺

  • Buy the underlying stock at the strike price.

  • The seller (writer).

  • Bearish — they expect the stock price to fall.

  • You are the buyer and have the right to exercise.

  • 100 shares.

  • The third Friday of the month at 11:59 PM.

  • The Options Clearing Corporation (OCC).

  • To sell the underlying stock if the option is exercised.