📘 Lesson 1: What Are Options?
🧠 Core Concept
Options are financial contracts that give the buyer the right, but not the obligation, to buy or sell a stock at a specific price before a certain date.
They are used to speculate, hedge, or generate income.
📝 Types of Options
There are only two types of options:
| Type | Right To… | Used When You Think… |
|---|---|---|
| Call | Buy a stock | The stock will go up |
| Put | Sell a stock | The stock will go down |
🔐 Real-Life Analogy: House Option
Let’s say you want to buy a house worth $300,000.
The seller gives you a 6-month option contract to buy the house at $300,000, and you pay $5,000 for that right.
- If the house goes up to $400,000 → You can still buy it at $300,000 and make a profit.
- If the house goes down to $250,000 → You can walk away, and only lose the $5,000 option fee.
This is exactly how a Call Option works.
📊 Key Terms
| Term | Definition |
|---|---|
| Underlying | The stock (or asset) the option is based on (e.g., AAPL, SPY) |
| Strike Price | The fixed price you have the right to buy/sell the stock |
| Expiration | The date by which you must use the option or let it expire |
| Premium | The price you pay to buy the option (just like the $5,000 in the analogy) |
🔁 How Options Work
Let’s use an example:
- AAPL stock is at $100
- You buy a Call Option with:
- Strike Price: $105
- Expiration: 30 days
- Premium: $2 per share ($200 total since 1 option = 100 shares)
Now, there are two scenarios:
- AAPL goes to $115
You can buy at $105 and sell at $115 → Profit = ($115 – $105 – $2) × 100 = $800 - AAPL stays below $105
You let the option expire, lose the premium = $200 loss
📉 Why Do People Buy Options?
- To risk less than buying the stock outright
- To get leveraged gains
- To protect other investments (like insurance)
⚖️ Options Contract Size
- Each standard option contract = 100 shares
- So if an option costs $2.00, that really means $200 per contract
🛡️ Summary:
- Options give you a choice, not an obligation.
- Calls = Right to Buy, Puts = Right to Sell
- You pay a premium to control 100 shares of stock.
- Used for trading, investing, and hedging.
✅ Quick Quiz (Try This!)
- What is the main difference between a Call and a Put?
- If you buy a call on TSLA with a $250 strike and TSLA rises to $300, did you make money?
- If the option premium is $1.50, how much is that per contract?
(Answers at the bottom of Lesson)
Find more quizzes to test your knowledge at Quizlet
📘 Answers to Quiz
- A Call gives you the right to buy, a Put gives the right to sell.
- Yes, if TSLA went to $300, you could profit (minus the premium).
- $150 per contract (since 1.50 × 100 shares).
Check out our Stock Options Analysis & Trading Strategies to dive deeper into stock options!