Options Trading for Beginners: How Options Contracts Work

What an Option Is (and How It Differs From Owning Stock)

An option is a standardized contract that references an underlying asset (most commonly a stock or ETF). It gives the buyer a defined set of rights for a limited time, in exchange for a price called the premium.

Stock ownership means you own shares. You participate in gains and losses dollar-for-dollar, and you can hold indefinitely.

Option ownership means you own a contract, not the shares (unless you exercise and buy/sell shares through the contract). Options have an expiration date, and their value can change due to both the underlying price movement and time remaining.

• Owning shares: no expiration; you have voting rights (for stocks) and may receive dividends.
• Owning an option: time-limited contract; typically no voting rights and no dividends unless you become a shareholder via exercise.

The Building Blocks of an Options Contract

1) Underlying Asset

The underlying is what the option is based on (e.g., shares of AAPL, SPY, or another listed security). The option’s price is closely linked to the underlying’s price, but it is not the same thing.

2) Contract Size (Multiplier)

In U.S. equity options, one contract typically controls 100 shares of the underlying. This is called the multiplier.

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• If an option premium is quoted as $2.50, that is $2.50 per share.
• The contract cost (ignoring fees) is $2.50 × 100 = $250.

Note: Some products (certain ETFs, mini options, or adjusted contracts after corporate actions) can have different multipliers, but 100 shares is the standard starting assumption.

3) Strike Price

The strike price is the price at which shares can be bought or sold if the option is exercised.

• Call option: strike is the price you can buy shares at.
• Put option: strike is the price you can sell shares at.

Example: A 50 strike call on a stock means the call holder has the right to buy shares at $50 per share (before expiration).

4) Expiration Date

Options are time-limited. The expiration date is the last day the option exists. After expiration, the contract is no longer tradable and will settle according to the rules of the market and broker (often expiring worthless if it has no intrinsic value).

Many equity options expire on a Friday (or the last trading day of the week if markets are closed). Some underlyings also have multiple expirations available (weekly, monthly, etc.).

5) Premium

The premium is the price of the option contract. It is quoted per share, but paid/received per contract using the multiplier.

Example: If the premium is $1.20, then one contract typically costs $1.20 × 100 = $120 (plus fees/commissions if applicable).

Buyer vs Seller: Rights, Obligations, and Assignment

Option Buyer (Holder)

The buyer (also called the holder) pays the premium and receives a key benefit: the right, but not the obligation, to exercise the option.

• Call buyer: has the right to buy 100 shares at the strike price.
• Put buyer: has the right to sell 100 shares at the strike price.

If exercising is not beneficial, the buyer can choose not to exercise. The most the buyer can lose (for a long option) is typically the premium paid.

Option Seller (Writer)

The seller (also called the writer) receives the premium but takes on an obligation. If assigned, the seller must fulfill the contract terms.

• Call seller: may be obligated to sell 100 shares at the strike price if assigned.
• Put seller: may be obligated to buy 100 shares at the strike price if assigned.

Assignment is when the option seller is selected (by the clearing process) to fulfill an exercised option. Assignment can happen any time up to expiration for American-style equity options.

Quick Rights/Obligations Table

How Options Are Identified: A Contract “Name” You’ll See

Options are typically displayed with the underlying symbol, expiration date, strike price, and type (call/put). Different platforms format this differently, but the components are the same.

Example (human-readable): XYZ 19 JAN 2026 50 CALL

• Underlying: XYZ
• Expiration: 19 JAN 2026
• Strike: 50
• Type: CALL

Reading a Basic Options Quote (Step-by-Step)

An options quote is a snapshot of the current market for a specific contract. Here’s a structured way to read it.

Step 1: Confirm You’re Looking at the Right Contract

• Underlying symbol
• Expiration date
• Strike price
• Call vs put

Small differences (like a different expiration week) can mean a completely different contract.

Step 2: Read the Bid and Ask (and Understand the Spread)

Options trade like many markets:

• Bid: the highest price someone is currently willing to pay (what you might receive if you sell immediately).
• Ask: the lowest price someone is currently willing to accept (what you might pay if you buy immediately).

Example quote:

Bid: 1.20   Ask: 1.35

This means you may be able to sell near $1.20 and buy near $1.35 per share. The bid/ask spread here is $0.15 per share, which is $15 per contract (because $0.15 × 100).

Step 3: Translate Per-Share Pricing Into Per-Contract Dollars

Options premiums are usually displayed per share. Multiply by 100 for the typical contract:

• $1.35 ask ≈ $135 per contract
• $1.20 bid ≈ $120 per contract

This is a common beginner mistake: thinking $1.35 means $1.35 total rather than $135 per contract.

Step 4: Check Volume

Volume is how many contracts traded today (so far). Higher volume often indicates more active trading in that contract.

Example:

Volume: 2,450

This means 2,450 contracts traded today (each typically representing 100 shares).

Step 5: Check Open Interest

Open interest (OI) is the number of contracts currently open (not closed or expired). It’s a measure of how many positions exist in that contract.

Example:

Open Interest: 18,900

This means 18,900 contracts are outstanding. OI updates less frequently than price (often end-of-day), depending on the data source.

Step 6: Note the “Last” Price (With Caution)

Last is the price of the most recent trade. It can be misleading if the last trade happened a while ago or if the spread is wide.

Example:

Last: 1.28

Even if Last is 1.28, the current actionable prices are still the bid and ask.

Reading an Options Chain (Calls and Puts Side-by-Side)

An options chain lists many contracts for the same underlying, organized by expiration dates and strike prices. Most chains show calls on the left and puts on the right, aligned by strike.

Typical Options Chain Layout

How to Walk Through the Chain (Practical Steps)

Step 1: Choose the Expiration Date Tab/Dropdown

Chains are grouped by expiration. Pick the date first, because the same strike can exist across many expirations with different prices.

Step 2: Find the Strike Row You Care About

Locate the strike price in the center column. Everything on that row corresponds to that strike:

• Left side: call prices and activity for that strike
• Right side: put prices and activity for that strike

Step 3: Use Bid/Ask to Estimate a Realistic Entry/Exit

If you plan to buy, the ask is the starting reference; if you plan to sell, the bid is the starting reference. Many traders place limit orders between bid and ask to try for a better fill.

Example: If a call shows Bid 1.35 / Ask 1.45, a buyer might try a limit at 1.40 (not guaranteed).

Step 4: Confirm Liquidity Clues With Volume and Open Interest

• Volume answers: “Is this contract trading today?”
• Open interest answers: “How many positions already exist?”

While not a guarantee, contracts with very low volume and low open interest can have wider spreads and more difficulty getting filled at a fair price.

Step 5: Convert the Displayed Premium to Dollar Exposure

Always translate the chain’s per-share premium into per-contract dollars.

• If the put ask is 3.05, that’s about $305 per contract (3.05 × 100).
• If the call bid is 0.78, that’s about $78 per contract (0.78 × 100).

Mini Walkthrough Example: Reading One Contract From the Chain

Suppose you’re looking at the 55 strike call in the table above:

• Contract: Underlying (same for entire chain), selected expiration, 55 strike, call
• Bid/Ask: 1.35 / 1.45 (per share)
• Estimated buy cost: about $145 per contract at the ask
• Estimated sell proceeds: about $135 per contract at the bid
• Volume: 1,450 contracts traded today
• Open interest: 12,200 contracts currently open

From this, you can quickly answer practical questions: “What might it cost to buy one contract?” “How much would I likely get if I sold immediately?” “Is it actively trading?”