Option Contract
An option contract is a standardized agreement giving the right to buy or sell 100 shares at a set price by a set date. Learn the four parts every contract spells out.
An option contract is a standardized agreement that gives you the right to buy or sell 100 shares of a stock at a fixed price, on or before a set date. It is the actual unit you trade when you trade options. One contract, one agreement, 100 shares.
Every option you will ever buy or sell is one of these contracts. Once you see the four things it spells out, the whole options market gets a lot less mysterious. Let me break it down.
A Standardized Agreement
The word that matters most is standardized. You do not negotiate the terms of an option contract the way you would haggle over a used car. The exchange has already fixed the format, so every contract for a given stock follows the same template. That standardization is what lets millions of them trade smoothly every day.
Think of it like a rental agreement with the blanks pre-printed. You only choose which version you want. The structure is always the same.
The Four Things It Spells Out
Every option contract answers four questions. Learn these four and you can read any option on any screen.
Type: call or put. A call is the right to buy. A put is the right to sell. This is the first fork.
The strike price. The fixed price at which you can buy (for a call) or sell (for a put). It is locked in for the life of the contract.
The expiration date. The deadline. After this date, the contract is done. An unexercised option simply expires, and any hope value in it goes to zero.
The underlying. The stock the contract is tied to. A call on Apple is a completely different contract from a call on Tesla, even at the same strike and expiration.
So a full contract reads like a sentence: "an Apple $200 call expiring March 21" tells you the underlying (Apple), the type (call), the strike ($200), and the expiration (March 21). Four pieces, one clear agreement.
Right, Not Obligation
One more thing worth underlining. For the buyer, an option contract is a right, not an obligation. You are never forced to use it. If it works out, you exercise or sell. If it does not, you let it expire and lose only the premium you paid.
The seller is on the other side. They took the premium, so they carry the obligation to deliver if the buyer exercises. That asymmetry, a right for the buyer and an obligation for the seller, is the heartbeat of every option contract.
- An option contract is a standardized agreement covering 100 shares.
- It spells out four things: type, strike, expiration, and underlying.
- For the buyer it is a right, not an obligation.
- The seller collects the premium and carries the obligation to deliver.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
How many shares does one standard option contract cover?
One contract is the standard unit and always covers 100 shares of the underlying stock.
Which of these is NOT one of the four things a contract spells out?
A contract spells out type, strike, expiration, and underlying. Commission is a broker fee, not part of the contract.
For the buyer, an option contract is what?
The buyer holds a right and can walk away, losing only the premium. The seller carries the obligation.
Bottom Line
An option contract is the standardized unit of the options market: an agreement covering 100 shares that spells out four things, type, strike, expiration, and underlying. For the buyer it is a right they may use or discard. For the seller it is an obligation they took on in exchange for the premium.
Read those four pieces on any option and you know exactly what you are holding. That is the foundation everything else is built on.
Keep going: the two types are the call and the put, and its price is the option premium.