What is an options contract? Rights, obligations and contract size

An option links a buyer's right to a seller's obligation. Learn to identify its terms and measure the dollars behind a quoted premium.

By OptionsKing. Publisher and editorial methods.

Read an option as an agreement before reading it as a price. In the example below, the buyer chooses whether to exercise; the seller must perform if assigned. We will identify the agreement, translate its quote into account dollars, and compare the two sides at expiration.

The definitions, from the people who issue them

OCC / Options Industry Council, Options Basics FAQ puts it plainly. "A call is an option contract that gives the owner the right to buy the underlying stock at a specified price (its strike price) for a certain, fixed period (until expiration)." And: "A put is an option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period (until expiration)."

Both definitions describe the owner's right. When you sell the contract, you take the other side: if the owner exercises, you must meet the contract's terms. Keep that distinction in view as you read the examples below.

Identify the four contract terms

A listed equity option is defined by four things, and they are fixed by the exchange rather than negotiated between you and a counterparty.

• The underlying. Which stock. Chipotle, ticker CMG, in every example on this page.
• The type. Call or put.
• The strike. The fixed price in the contract. $42, say.
• The expiration. The date the right runs out. September 19, 45 days from the snapshot these pages run on.

That is the entire contract. There is no negotiation, no counterparty credit check, no custom terms. You are not selling to a person. You are selling into a pool, and OCC stands between you and whoever ends up on the other side, which is why you can sell an option at 10am and never think about who bought it.

Convert the quote to contract dollars

One contract covers 100 shares. Every quoted price is per share, so multiply by 100 to get money.

CMG is at $38.40. The September 19 $42 call is quoted $0.71 bid, $0.76 ask.

• Sell one at the bid and $71 lands in your account. Not 71 cents.
• The obligation you took on covers 100 shares, currently worth $3,840.
• If CMG finishes at $47, you deliver 100 shares at $42 into a $47 market. That is $500 of value handed over, against $71 collected.

The multiplier is the single most common way new sellers get their size wrong. Ten contracts is not ten shares of exposure. It is a thousand, or $38,400 of CMG, from a position that showed up in the account as $710 of credit.

Compare the buyer's right with the seller's obligation

Separate the option from any stock position behind it. The table shows an uncovered short call: its losses grow as the stock rises. Owning the deliverable shares changes the combined position into a covered call, where a rally creates forgone gains rather than an unfunded delivery obligation.

Here is the asymmetry in one table, on the same $42 call.

The buyer's worst case is on the first line and it never gets worse. Yours is on the last line and that line does not stop. Nothing about the contract caps it. A short call on a stock that gets taken over at a premium is the classic version of this and it happens to somebody every quarter.

Which is why the two strategies this site is built around never sell a bare call. A covered call owns the 100 shares first, so delivery is already funded. A cash-secured put parks the strike times 100 in cash, so the purchase is already funded. Both convert an open-ended obligation into one you can actually meet.

How a short position ends

Once an assignment is allocated to your account, the contract's delivery terms apply. If somebody exercises against you, your broker moves the shares and the cash, and you find out afterwards. The assignment page walks the timeline hour by hour.

You do have one out before then: buy the same contract back and the position is gone. That is a market transaction at whatever the option costs at that moment, which may be far more than you sold it for. You can seek to close in the market before assignment; a fill is not guaranteed. You cannot refuse an assignment.

Where the price comes from

The $42 call is worth $0.73 at the mid, and every cent of that is the market's price for a chance. CMG has to be above $42 at expiry for the contract to pay the buyer anything, and on this chain the model puts that at 22.9 percent. You are being paid $73 to take a 22.9 percent chance of a bill whose size you do not know yet.

Five inputs decide it: the stock price, the strike, the time left, the interest rate, and how much the stock is expected to move. That last one is doing most of the work and it has a whole series of its own. The model that combines them is fifty years old and every screen you look at still runs it.

Common questions

Sources

• OCC / Options Industry Council, Options Basics FAQ
• OCC / Options Industry Council, Options Exercise FAQ
• OCC, Characteristics and Risks of Standardized Options

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.

Keep reading

• All four positions, with the payoff of each
• Which side to sell, and why they are not symmetric
• What the premium is actually compensating

Do the math on your own trade

• Covered call calculator premium, break-even, static and if-called return, annualized.
• Cash-secured put calculator credit, break-even, return on secured capital, annualized.
• Black-Scholes calculator price and Greeks from five inputs.

Every price in this article is an illustrative worked example, not a quote. Read Options basics for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.