VEGA FIELD GUIDE · 01 · FOUNDATIONS
Options, from the contract up
An option is a small contract with a surprisingly specific job. Once you know who holds the right, who carries the obligation, and what the clock controls, the rest of the market starts to look much friendlier.
A call gives its holder the right to buy the underlying at the strike; a put gives its holder the right to sell it.
The option buyer pays a premium for a right. The option seller receives the premium and accepts an obligation if assigned.
A standard listed equity option usually represents 100 shares, so a $2.40 quote usually means $240 per contract before fees.
The four coordinates of an option
Every listed option can be located with four pieces of information: the underlying, the option type, the strike, and the expiration. A ticker such as AAPL names the underlying. Call or put describes the contractual right. The strike sets the transaction price if the option is exercised. The expiration sets the life of the contract.
The market quote supplies a fifth item, the premium. Premiums move during the trading day as the stock price, time remaining, implied volatility, rates, dividends, and order flow change.
One contract combines all four coordinates.
Calls and puts in plain English
A call holder can buy the underlying at the strike. A put holder can sell the underlying at the strike. The holder chooses whether to exercise, sell the contract in the market, or let it expire.
The seller sits on the other side of that choice. A call seller may have to deliver shares. A put seller may have to purchase shares. This obligation explains why selling an option can require substantial capital or collateral.
| Position | Contract right or obligation | Typical directional exposure |
|---|---|---|
| Long call | Right to buy at the strike | Benefits from a rise in the underlying |
| Short call | Obligation to sell if assigned | Benefits from a flat or falling underlying |
| Long put | Right to sell at the strike | Benefits from a decline in the underlying |
| Short put | Obligation to buy if assigned | Benefits from a flat or rising underlying |
A concrete contract example
Suppose XYZ trades at $100. A one-month 105 call is quoted at $2.40. Buying one contract costs about $240 because the quote is per share and the usual contract multiplier is 100. At expiration, a stock price of $112 gives the call $7 of intrinsic value per share. Its expiration value is $700, for a $460 gain before fees and other trading costs.
If XYZ finishes at $103, the call expires without intrinsic value. The buyer loses the $240 premium. The example shows why being directionally correct may still produce a loss: the size and timing of the move matter, along with the premium paid.
max(stock price - strike, 0) x multiplier - premium paidCorporate actions can adjust a contract multiplier, strike, or deliverable. Review the contract specifications when the series is marked as adjusted or nonstandard.
Where the premium comes from
An option premium can contain intrinsic value and extrinsic value. Intrinsic value reflects the immediate exercise value. Extrinsic value reflects the remaining possibilities before expiration and is shaped heavily by time and implied volatility.
A higher premium can reflect a wider range of possible outcomes, a longer clock, a favorable move in the underlying, or a less competitive quote. Vega separates these ingredients across history, expiration, and strike so the price has context.
A useful first workflow
- Write down the market view and the date by which it should play out.
- Choose a call or put and decide whether buying or selling fits the risk budget.
- Check the expiration, strike, multiplier, settlement type, and exercise style.
- Inspect the bid, ask, implied volatility, and open interest before setting an order price.
- Model the payoff across several stock prices and dates, including an outcome that is mildly wrong.
Long options can lose the full premium. Some short-option positions can produce losses that exceed the premium received. Read the OCC disclosure document before trading listed options.
Put a contract on the payoff grid
Choose a call or put, change its strike and expiration, and watch the payoff and Greeks respond.