Learn the fundamentals of options trading step by step. Master the foundations, then understand how options are priced.
An option is a contract that gives you the right, but not the obligation to buy or sell a stock at a fixed price (the strike price) on or before a specific date (the expiration date).
An option is not random—it is defined by five parameters. If you understand these, you understand most of what makes options behave the way they do.
This is the actual asset you're getting the right to buy or sell. Think of it as the "subject" of your option contract. The option's value moves based on what happens to this underlying asset. For example, if you buy an AAPL call option, you're betting on Apple's stock price going up.
This is the "locked-in" price for your transaction. For a call option, the strike is the price you can buy the stock at, regardless of where the stock price goes. For a put option, it's the price you can sell at. The strike price is set when you buy the option and never changes. Important: You would only exercise a call option if the stock price is above the strike price (in the money). If AAPL is trading at $175 and you have a $180 call, you would not exercise it because you can buy AAPL cheaper on the open market at $175. You'd simply let the option expire worthless. However, if AAPL rises to $200, then exercising your $180 call makes sense—you can buy at $180 and immediately sell at $200 for a $20 per share profit.
Options have a deadline—they're not valid forever. The expiration date is when your right to buy or sell expires. After this date, the option becomes worthless if it's out of the money. Most options expire on the third Friday of each month at 4:00 PM ET. You can exercise (use) your option anytime before expiration, or you can sell it to another trader. As expiration approaches, time value decays, which is why many traders close positions before expiration.
One option contract doesn't control just one share—it controls 100 shares of stock. This is the standard multiplier for most stock options. So when you buy 1 call option, you're actually buying the right to purchase 100 shares. This means if the option premium is $5 per share, you'll pay $500 total (100 shares × $5). Similarly, if your option becomes profitable, your gains are multiplied by 100. This leverage is powerful but also increases risk.
This determines the direction of your bet. A call option gives you the right to buy the stock at the strike price. You buy calls when you think the stock will go up. A put option gives you the right to sell the stock at the strike price. You buy puts when you think the stock will go down, or to protect existing stock positions. The type is fundamental—it completely changes how the option behaves and what scenarios make it profitable.
You buy this call option for $5.00 per share ($500 total). AAPL is currently at $175. By expiration date:
An option’s price has two components: intrinsic value (what it would be worth if you exercised it right now) and extrinsic value (time value + volatility + other factors).
Intrinsic value is the option’s built-in value right now. Example: stock $105 and a $100 call → intrinsic value $5 (you can buy $5 cheaper than the market).
Whatever is left after intrinsic value is extrinsic value—Extrinsic value is the part of an option’s price that isn’t based on “real value right now,” but on possibility—you’re paying for the chance that the stock moves in your favor before the deadline; as the expiration date gets closer, there’s less time for that move to happen, so this part usually shrinks, but it can also grow when the market starts expecting bigger or faster moves (for example before earnings or major news), because that extra uncertainty makes the option more valuable even if the stock price hasn’t changed yet.
Moneyness tells you whether an option has intrinsic value and how sensitive it is to movements in the underlying.
Move the slider in the interactive moneyness visualizer below to see how moneyness changes with stock price at expiration date.
Move the slider to see how moneyness changes with stock price at expiration date.
Most options are traded and closed before expiration—you buy an option, later you sell it (or if you sold one, you buy it back). But if you still hold an option when it expires, it will end in one of three outcomes: it expires worthless, it settles into shares, or it settles into cash.
If an option has no built-in value at expiration, it becomes worth $0 and disappears.
Example: Stock closes at $98, you have a $100 call → worthless.
Example: Stock closes at $102, you have a $100 put → worthless.
If you bought that option, your loss is typically the premium you paid. If you sold that option, worthless expiry is usually what you want—you keep the premium (ignoring fees/margin).
For most single-stock options, if the option finishes with built-in value and you're still holding it at expiration, it can turn into a stock transaction for 100 shares per contract:
If you sold the option, you can be assigned:
Some products (often many index options) don't deliver shares. Instead, your account is adjusted by cash based on how far the option finished with value. No shares show up—only a cash credit/debit.
You don't need to hold options to expiration. Many traders close or roll positions before expiry to avoid two things beginners hate: an option going to $0 unexpectedly (worthless expiration) or waking up to a surprise stock position (assignment/exercise).
See how calls and puts behave with real market data. Adjust strike prices, expiration dates, and implied volatility to see option values and greeks change in real time.