Options Contract
A contract giving the buyer the right — but not the obligation — to buy or sell an underlying asset at a set price before or on expiration.
An options contract grants the buyer a right without an obligation. The seller (writer) receives a premium upfront and is obligated to perform if the buyer exercises.
There are two fundamental types: a call option (right to buy) and a put option (right to sell). Options are further classified as American (exercisable any time before expiry) or European (exercisable only at expiry).
The premium consists of intrinsic value — the in-the-money amount — plus time value, which decays as expiration approaches.
Example
A trader pays $3.20 for one AAPL $200 call expiring in 30 days. The most they can lose is $320 (the premium). If AAPL reaches $210 at expiry, the call is worth $10 intrinsically, yielding a $6.80 profit per share.
Related Terms
Assignment
The process by which an option seller is required to fulfil their obligation — delivering or buying the underlying — when the buyer exercises.
IntermediateBlack-Scholes Model
The foundational closed-form formula for pricing European options from spot, strike, time, interest rate, and volatility.
AdvancedCall Option
An options contract giving the buyer the right to purchase the underlying asset at the strike price before or on expiration.
BeginnerDerivative
A financial contract whose value is derived from the price of an underlying asset such as a stock, index, commodity, or currency.
IntermediateExpiration Date
The last date on which an option can be exercised; after this date the contract ceases to exist.
IntermediateIntrinsic Value
The immediate exercise value of an option — how much in the money it is right now, ignoring time and volatility.
IntermediatePremium
The price paid by the option buyer to the option seller for the rights granted by the contract.
IntermediatePut Option
An options contract giving the buyer the right to sell the underlying asset at the strike price before or on expiration.
BeginnerRho
The sensitivity of an option's price to a 1-percentage-point change in the risk-free interest rate.
AdvancedTime Value
The portion of an option's premium beyond its intrinsic value, reflecting the probability that the option moves further in the money before expiry.
Intermediate