What is a stock option ?

A stock option gives the investor the right, but not the obligation, to buy or sell a stock at an agreed upon price and date. 

There are two types options, 

PUTS ; is a bet that the stock will fall (shorting the stock).


CALLS ; is the bet a stock will rise. 

* American Options give the investor the right to be exercised any time between the contracts purchase and expiration date. 

Contracts: ONE contract represents 100 shares of the underlying stock.

Contracts represent the number of options a trader may be looking to buy. Since one contract equals a 100 shares of the specific chosen stock, 2 contracts would equal 200 shares total. \

Expiration Date: 

Buying options not only allows the trader to bet on a stock rising or falling but also enables the trader to pick a specific date when they expect the stock to Fall or Rise by. 

The expiration date attached to the contract is especially important because it helps the trader to price the Value of the PUT or CALL that was originally placed on that contract.

This value placed on the contract choice and expiration date is called the Time Value. The price or value of the given contract can fluctuate based on this Time Value. 

The Time Value is factored into many different pricing models that are used with contracts, for example the Black Scholes Model. 


The premium is determined by taking the price of the CALL and multiplying it it by 100 …

( because every single one contract represents 100 shares ) 

EX ; If a trader buys 5 January IBM $150 Calls for $1 per contract, the trader would spend $500.

  • This is someone betting that the IBM stock will rise to $150 and they are paying $1 per contract.. [ So if the investor “wins” and full-fills the contract that they bought for $500 , how much will they receive in profit ???? ]

!!! BUT I still do not understand the profits, if that contract us fulfilled. The price of contract in relativity to to the value or Risk factor of that given Contracts STRIKE PRICE.


The price determines weather an option should or is eligible to be exercised.

This Strike Price is the price a trader expects the stock to be above or below on there expiration date. 

If the trader is betting that a stock will be higher in the future, they may want to place a CALL contract on that stock for a specific Month and price. 


You will want to choose a specific trading strategy and STICK to it, weather it involves placing a PUT or CALL it is important to always follow the tragedy and to not get distracted with emotions.