Option Contracts: Calls, Puts, Strikes, Expiration and Contract Units
Summary
This introduction defines an option as a contract giving its holder a right, without an obligation, to trade an underlying asset at a specified strike price by an expiration date. It distinguishes calls, which grant the right to buy, from puts, which grant the right to sell. The article also explains contract units or multipliers, with examples from US stock options, equity index options and futures options, and describes the exercise timing of European and American contracts.
A TSLA call example illustrates intrinsic value: when the stock trades below the strike, immediate exercise would not be economically useful; above the strike, buying at the strike and selling at the market can produce an exercise gain. The article adds that time remaining and the possibility of future price movement can give an option value even when it has no current intrinsic value. This is a conceptual primer rather than a pricing method: it does not quantify time value, premiums, transaction costs or exercise risks, and its contract-unit examples are general conventions that can vary by contract.
Key ideas
- A call grants the right to buy the underlying, while a put grants the right to sell it.
- The strike is the contract price, and the expiration date limits when the right can be exercised.
- Contract units vary by underlying and option type.
- American options may be exercised before expiration, while European options are exercised at expiration.
- An option can have value from future possibilities even when immediate exercise has no intrinsic value.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.