What this lesson is about
A right, not an obligation, to buy or sell at a fixed price. The two-sentence idea underneath every options strategy that exists.
Part 1 of 2
Almost every options strategy starts with two basic components: a call and a put. An option is a derivative contract. Its value comes from the price of an underlying asset, usually a stock. It doesn’t have value on its own. What makes it an "option" is that the holder has a right, not an obligation. They can decide to use it or let it expire, depending on what’s best for them.
A call option lets you buy the underlying asset at a fixed price, known as the strike price. This happens on or before a specific expiration date. A put option, on the other hand, allows you to sell the underlying asset at the strike price, again on or before expiration. In both situations, the price you pay for that right is called the premium. A standard U.S. equity option contract represents 100 shares of the underlying stock. That’s why option prices are quoted per share, but a single contract actually costs 100 times that quoted price.
Quick check
What is an option, in the most basic sense?
The word "right, not obligation" is the single most important distinction - the option holder can choose whether to use it or let it expire.
Part 2 of 2
Quick check
What does a call option give its holder the right to do?
"Call" options let the holder call the stock away from someone else - buy it - at the agreed strike price.
Test what you just learned. Correct moves you up, wrong moves you down - reach 100 to master this lesson.