An options contract is a right, not an obligation. The buyer pays a premium today for the right to buy or sell 100 shares of an underlying stock at a fixed price (the strike) on or before a fixed date (expiration). The seller takes the premium and accepts the obligation in return.
Two contract types do all the work. A call gives the buyer the right to buy 100 shares at the strike. A put gives the buyer the right to sell 100 shares at the strike. Every options strategy on Earth, from a covered call to a twisted sister, is built from those two atoms in some combination of bought and sold legs.
The premium is what you actually pay or collect. It has two components: intrinsic value (how far in-the-money the option already is) and extrinsic value (time value plus implied volatility). Extrinsic value decays every day the underlying does not move favorably. That decay — theta — is the silent tax beginners pay when they buy out-of-the-money options and watch them evaporate even though the stock did not move against them.
Frequently Asked Questions
What's the difference between a call and a put?
A call is a bullish bet — it gains value when the underlying rises. A put is a bearish bet — it gains value when the underlying falls. Both can be bought (paying premium) or sold (collecting premium).
Why do options have an expiration date?
Because the right is finite. The seller has only agreed to be on the hook until that date. After expiration, the contract simply ceases to exist — worthless if out-of-the-money, or auto-exercised if in-the-money.