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An options contract gives you the right, but not the obligation, to buy or sell shares at a predetermined price by a specific date. Think of it like putting a deposit on a house: you pay a small fee (say $5,000) to lock in a purchase price of $500,000 for 30 days. If the house value jumps to $600,000, you can still buy it at $500,000. If the value crashes, you simply walk away and only lose your deposit.
The Golden Rule: Each options contract controls 100 shares of the underlying stock. This means when you see an option priced at $2.50, you're actually paying $250 to buy that contract ($2.50 × 100 shares).
Options provide supercharged leverage compared to buying stocks outright. While a stock might move 1% in a day, an option on that same stock could move 20%, 50%, or even 100% in the same timeframe. This cuts both ways—options can generate significant profits quickly, but losses can accumulate just as fast.
Every option has four key components:
Underlying AssetThe stock or ETF the option is based on (examples: Apple, SPY, Tesla)
Expiration DateMost stocks have weekly options that expire every Friday. Some heavily traded ETFs like SPY and QQQ offer daily expirations, while others may only expire monthly or bi-weekly.
Strike PriceThe predetermined price at which you can buy or sell the underlying stock. Strike prices are typically available in $1 increments for actively traded stocks. For example, if SPY trades at $500, you'll see strikes at $499, $500, $501, $502, and so on.
TypeOptions come in two types: calls and puts.
A call option is a bullish position that gives you the right to buy shares at a specific strike price. You profit when the stock price rises above your strike price.
Example: If you buy a $100 call and the stock rises above $100, your call is "in the money" and profitable. If the stock stays below $100 at expiration, the option expires worthless.
A put option is a bearish position that gives you the right to sell shares at a specific strike price. You profit when the stock price falls below your strike price.
Example: If you buy a $100 put and the stock falls below $100, your put becomes profitable. If the stock stays above $100 at expiration, the option expires worthless.
An options chain displays all available options for a given stock. Here's how to read it:
Remember to multiply all prices by 100 to get the actual cost. A bid of $12.50 means you'll pay $1,250 for that contract.
Most options chains also display the expiration date at the top and allow you to filter by different expiration dates to find the timeframe that fits your strategy.
Option prices consist of two components:
The amount an option is "in the money." For a call option, this is calculated as: Stock Price - Strike Price. If SPY trades at $510 and you own a $500 call, your intrinsic value is $10.
The "hope value" based on time remaining until expiration and market volatility. The more time left and the higher the volatility, the more extrinsic value an option has.
Total Option Price = Intrinsic Value + Extrinsic Value
For Calls: Stock price is higher than strike price (SPY at $500, looking at $480 call)
For Puts: Stock price is lower than strike price (SPY at $500, looking at $520 put)
ITM options have intrinsic value and move more closely with the underlying stock price.
The strike price equals (or is very close to) the current stock price. These options have the highest extrinsic value relative to their price.
For Calls: Strike price is higher than stock price (SPY at $500, looking at $510 call)
For Puts: Strike price is lower than stock price (SPY at $500, looking at $490 put)
OTM options are riskier, decay faster, but offer higher percentage returns if the stock moves in your favor. They consist entirely of extrinsic value.
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