What Is an Option? Calls & Puts Explained

Summary

A stock option gives its buyer a contractual right; contract size, exercise style and settlement terms determine what that right involves.

The core definition

This lesson focuses on standard unadjusted US equity options, which generally cover 100 shares. A call gives its buyer a right to buy and a put a right to sell at the strike under the contract terms. American-style options can be exercised before expiry; European-style options have a different exercise schedule. Adjusted contracts and cash-settled index options can have different deliverables. The writer takes the corresponding obligation. Read the specific contract and OCC risk disclosure rather than assume every option is identical.

Because one contract controls 100 shares, a call option quoted at $2.50 actually costs $250 to buy. That single number embeds four separate ideas: the direction you expect (up for calls, down for puts), how far you expect the move to go (the strike), how much time you're giving it (the expiration), and how much volatility the market currently prices in.

Why options exist

A share holder can buy a put to offset some losses below its strike during the option term, at the cost of its premium. A covered call adds premium income but limits upside and retains substantial share-price risk. These examples illustrate different payoffs; neither is a guaranteed return or a universally suitable position.

A simple worked example

Imagine Apple trades at $180 and you buy one 30-day $185 call for $3.00 ($300 total). Three things can happen. If Apple closes above $188 on expiration, you're profitable — the intrinsic value of the call exceeds what you paid. If it closes between $185 and $188 you're partially in-the-money but net negative. If it closes at or below $185, the call expires worthless and you lose the full $300 — but nothing more. These are hypothetical expiration payoffs before costs for the purchased option alone. Exercise can create a stock position with separate funding and market risk. Short options have different obligations, and an uncovered short call can have unlimited loss.

What you can practise on TradeHQ

TradeHQ supports spot instruments, including shares and ETFs, with $100,000 virtual capital. It does not model option strikes, expirations or premiums. Use this lesson's worked examples to calculate hypothetical contract payoffs on paper; buying an underlying share in the simulator is a different transaction from buying an option on it.

> Options are contracts, not shares. You are trading a right that decays with time.

(Educational only — not financial advice. TradeHQ offers $100,000 virtual cash for supported spot instruments. Options contracts, Greeks, futures margin and settlement are conceptual exercises; the simulator does not execute them.)

Key takeaways

• A standard unadjusted US equity option generally covers 100 shares; adjusted and other contracts can differ.
• At expiration, before costs, a purchased call has a net gain above strike + premium; a purchased put has a net gain below strike − premium. Those levels are break-even prices.
• A purchased option held without exercise can lose its premium plus costs; exercise can create a separate underlying position and obligations.
• Options can be used for hedging and speculation; their risk depends on the position and contract.

Check your understanding

• How many shares does one standard US equity option contract control? Options: 10; 50; 100; 1,000. Correct answer: 100. Why: A standard unadjusted US equity option generally covers 100 shares. Adjusted deliverables and other option types differ.
• What is the maximum loss for someone who buys (goes long) a single call option? Options: Unlimited; The strike price × 100; The premium paid; The stock price × 100. Correct answer: The premium paid. Why: For the purchased option alone before exercise and costs, loss is limited to the premium. Exercise can create a separate position.
• A call option gives the buyer the right to: Options: Sell shares at the strike price; Buy shares at the strike price; Short the stock; Receive dividends. Correct answer: Buy shares at the strike price. Why: Call = right to buy. Put = right to sell.
• Buying a protective put alongside shares is an example of: Options: Eliminating every cost; A guaranteed gain; Hedging downside exposure; Avoiding contract terms. Correct answer: Hedging downside exposure. Why: A put can offset some downside below its strike, but the premium, expiry and other terms matter.

Sources

• OCC — Characteristics and Risks of Standardized Options (https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document)
• OIC — Options Basics (https://www.optionseducation.org/optionsoverview/options-basics)
• Cboe Options Institute (https://www.cboe.com/education/)

Practise this lesson

Use $100,000 in virtual cash to practise supported spot instruments and general habits such as recording a trade thesis. Options contracts, Greeks, futures margin and daily settlement are conceptual exercises: calculate their examples in a worksheet, because TradeHQ does not execute derivatives contracts. Educational simulation only — not financial advice.