Options basics
Build the foundations for understanding option selling: contractual rights and obligations, prices and quotes, payoff shapes, and the risks behind premium. The lessons use one illustrative chain so you can connect the concepts rather than memorize isolated terms.
By OptionsKing. Publisher and editorial methods.
Learning path
Start with the contract, the four basic positions, and reading a chain. Practice identifying who has a right, who has an obligation, and how one contract translates into dollars.
Continue with intrinsic and extrinsic value, strike and expiry, and risk and compensation. Then review small-account constraints and planning decisions before entry.
Lessons
- What is an options contract? Rights, obligations and contract sizeAn option links a buyer's right to a seller's obligation. Learn to identify its terms and measure the dollars behind a quoted premium.
- Calls vs puts: compare the seller's obligationsCompare a covered call with a cash-secured put by their obligations, capital needs, and remaining stock exposure.
- Strike, expiration and premium: how contract terms interactStrike and expiration jointly determine an option's premium and exposure. Compare them using one chain rather than a single rule of thumb.
- How to read an options chainRead a chain by contract identity, executable quotes, exposure, and liquidity. Each column answers a different question.
- Bid, ask, midpoint and mark: quotes vs execution pricesThe bid and ask define a quoted market; the mid and mark are reference values. Learn how that difference affects an order and its profit.
- Intrinsic vs extrinsic valueSeparate immediate exercise value from the remaining option price. The distinction helps explain premium, decay and early exercise.
- In, at and out of the money: moneyness and payoffMoneyness compares stock price with strike. It identifies exercise value, but does not tell you whether a trade is profitable.
- Why option sellers receive a premiumPremium compensates an option seller for accepting a contingent obligation. Learn why frequent small wins alone do not establish an advantage.
- The four basic option positions: payoffs and risksBuying or selling a call or put creates four different payoff shapes. Learn their limits before combining them with stock or cash.
- American vs European options: exercise and settlementExercise style determines when a holder may exercise. Settlement method determines what changes hands. Check both in a contract's specifications.
- Open interest vs volume: interpreting trading activityVolume counts today's trading; open interest counts outstanding contracts. Read them together with the quote rather than as a prediction.
- Adjusted option contracts: check the deliverableAn adjusted option can deliver a nonstandard mix of shares and cash. Read the actual terms before applying a standard options calculation.
- Options for small accounts: funding, sizing and trade-offsA trade must fit both buying power and a loss budget. Use the same contracts to see why those two limits give different answers.
- Selling options: seven trade-offs to understandEvaluate premium income through the whole position: payoff, costs, repeated exposure, capital and taxes. One covered call connects all five.
- Options trading psychology: decisions before and during a tradePosition size and a written decision process make changing option prices easier to evaluate. Use one put to distinguish emotion from new information.
How to use the worked chain
The running example uses Chipotle at $38.40 and a 45-day expiration. Prices, spreads, volume, and open interest are illustrative, not current market data. Recalculate the examples and check which assumptions matter when you change an input.
Basic payoff arithmetic can be simple while execution, exercise, and portfolio risk remain demanding. Before moving to a strategy, you should be able to explain its maximum gain, downside, capital obligation, and how it can be closed.
Common questions
What is an option?
A contract giving its holder a specified right and its writer the matching obligation. A standard U.S. equity option usually represents 100 shares, but adjusted contracts can differ.
What should I know before selling one?
The contract terms and deliverable, payoff and worst case, cash or share obligation, exercise style, broker rules, and closing process. Understanding the terms is not by itself proof a trade is suitable.
Must I trade bought options first?
No, but understanding both sides helps explain pricing and risk. Buying and selling each require attention to direction, timing, volatility, and position size.
Is premium received the same as profit?
No. It is an opening cash flow. Closing costs and any stock or settlement obligations determine the result.
Run your own numbers
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.