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What Is an Option? Calls, Puts, and the Basic Vocabulary

Options and Derivatives • Beginner Investing • 7 min

Nearly every options strategy that exists, no matter how complicated it eventually gets, is built from two basic building blocks: a call and a put. An option is a derivative contract — its value is derived from the price of some other, underlying asset (most commonly a stock) rather than having independent value of its own. What makes it an "option" specifically is that the holder has a right, not an obligation: they can choose to use it, or simply let it expire, whichever turns out to be better for them.

A call option gives its holder the right to buy the underlying asset at a fixed price — called the strike price — on or before a specified expiration date. A put option gives the holder the right to sell the underlying asset at the strike price, on or before expiration. In both cases, the price paid to acquire that right is called the premium. A standard U.S. equity option contract represents 100 shares of the underlying stock, which is why option prices are quoted per share but a single contract actually costs 100 times the quoted price.

Insider Angle: one distinction worth knowing early: American-style options (the standard for most individual stocks) can be exercised at any point up to and including expiration, while European-style options (common for broad index products) can only be exercised exactly at expiration, not before. This isn't a geography rule — American options trade in Europe and vice versa — it's purely about the timing flexibility built into the contract itself, and it affects how certain option strategies and pricing models are actually built.
Try This: Look up the options chain for any stock you're familiar with (most brokerage apps and financial data sites show this for free). Find one call option and one put option at the same strike price and expiration date, and note their current premiums.

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