What Are Stock Options? Calls, Puts & How They Work
A plain-English explanation of options contracts, calls, puts, strike prices, and expiration dates.
Updated October 7, 2026 · 3 min read
In Short
A stock option is a contract that gives you the right — but not the obligation — to buy or sell 100 shares of a stock at a specific price before a specific date. You pay a premium upfront for that right.
On This Page
What Is A Stock Option?
The key word is right, not obligation. If the trade works in your favour, you exercise or sell the option. If it doesn't, you simply let it expire — and your maximum loss is the premium you paid.
Calls Vs Puts
There are only two types of options contracts:
| Type | You have the right to... | You profit when... | Outlook |
|---|---|---|---|
| Call option | Buy 100 shares at the strike price | Stock price rises above the strike | Bullish |
| Put option | Sell 100 shares at the strike price | Stock price falls below the strike | Bearish |
Key Terms Every Options Trader Needs To Know
Strike Price
The strike price (or exercise price) is the fixed price at which the option allows you to buy or sell the stock. If you hold a call with a $150 strike on a stock trading at $160, you have the right to buy it at $150 — a $10 per share discount.
Expiration Date
Every options contract has an expiration date — the last day the contract is valid. Most equity options expire on the third Friday of the month, though weekly expirations (every Friday) are common on liquid stocks. After expiration, the contract either gets exercised or expires worthless.
Premium
The premium is the price you pay to buy an options contract. It has two components:
- Intrinsic value — the amount the option is already in the money (real, immediate value)
- Time value (extrinsic value) — the extra amount paid for the time remaining and uncertainty. This decays to zero by expiration.
In The Money, At The Money, Out Of The Money
These terms describe the relationship between the strike price and the current stock price:
| Term | Call option | Put option | Has intrinsic value? |
|---|---|---|---|
| In the money (ITM) | Stock price > strike price | Stock price < strike price | Yes |
| At the money (ATM) | Stock price ≈ strike price | Stock price ≈ strike price | No (or minimal) |
| Out of the money (OTM) | Stock price < strike price | Stock price > strike price | No |
OTM options are cheaper but expire worthless more often. ITM options cost more but behave more predictably. Beginners often start with ATM options for a balance of cost and responsiveness.
A Real Example: AAPL Call Option
Say Apple (AAPL) is trading at $180. You buy a $185 call expiring in 30 days for a premium of $2.00 (total cost: $200 per contract).
- If AAPL rises to $195: Your call is now worth at least $10 (195 - 185). Profit = $10 - $2 premium = $8 per share = $800 per contract.
- If AAPL stays at $180: The option expires OTM, worthless. Loss = $200 (the premium you paid).
- If AAPL falls to $170: Same — option expires worthless. Loss = $200 maximum.
Your maximum loss is always capped at the premium paid when buying options. Your upside on calls is theoretically unlimited.
Options Vs Buying Stock
| Buying stock | Buying a call option | |
|---|---|---|
| Capital required | Full share price × shares | Just the premium (much less) |
| Max loss | Full investment (if stock goes to 0) | Premium paid only |
| Upside | Unlimited | Unlimited |
| Time limit | None — hold forever | Must be right before expiration |
| Time decay | None | Loses value daily (theta decay) |
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Frequently Asked Questions
What is a stock option?
A stock option is a contract that gives you the right — but not the obligation — to buy or sell 100 shares of a stock at a specific price (the strike price) before a specific date (the expiration date). You pay a premium upfront for this right.
What is the difference between a call and a put option?
A call option gives you the right to buy 100 shares at the strike price — you profit if the stock goes up. A put option gives you the right to sell 100 shares at the strike price — you profit if the stock goes down.
What is a strike price?
The strike price (also called the exercise price) is the fixed price at which an options contract allows you to buy (call) or sell (put) the underlying stock, regardless of the current market price.
What does in-the-money mean for options?
A call option is in-the-money (ITM) when the stock price is above the strike price. A put option is in-the-money when the stock price is below the strike price. In-the-money options have intrinsic value.
Can you lose all your money on options?
Yes. When you buy an options contract (long call or long put), the maximum loss is the premium you paid. If the option expires worthless — meaning it's out of the money at expiration — you lose 100% of what you paid for it.