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There are two types of equity options: call options and put options. Both types can be bought and sold by investors. The definitions are as follows:

Call Option

a contract that grants the buyer the right, but not the obligation, to purchase the underlying stock at a fixed price any time before the expiration date of the contract.

Put Option

a contract that grants the buyer the right, but not the obligation, to sell the underlying stock at a fixed price any time before the expiration date of the contract.

Call Option: if an investor purchases a December 80 call option contract on Visa, the investor has the right, but not the obligation, to purchase the underlying stock at $80 per share any time before the contract expires (December).

Put Option: if an investor purchases a December 70 put option contract on Visa, the investor has the right, but not the obligation, to sell the underlying stock at $70 per share any time before the contract expires (December).

One option contract represents 100 shares of the underlying stock. Therefore, in the examples above, the option contract grants the buyer the right to purchase 100 shares of the underlying stock at the fixed price any time before expiration.

Option prices (premiums) are quoted on a per share basis. For example, if an option contract costs $2.80 to purchase, the real cost of the option contract would be $280 ($2.80 x 100 shares).

Now that we understand what call and put option contracts are, let's establish the way these contracts are exchanged between buyers and sellers. They are as follows:

Long Call Option

a buyer purchases a call option contract from a seller.

Long Put Option

a buyer purchases a put option contract from a seller.

Short Call Option

a seller writes a call option contract to a call buyer.

Short Put Option

a seller writes a put option contract to a put buyer.

The buyer of an option contract purchases the right while the seller of an option contract grants the right.

The buyer pays a premium to acquire the right from the seller. The seller receives the premium in exchange for granting the right to the buyer.

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Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information on this website is provided solely for general education and information purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in the website information. No statement within the website should be construed as a recommendation to buy or sell a security or to provide investment advice.

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1.1- Option Basics