Lesson 02 / the two doors
Every option is one of two things. A call or a put. Once you know which door you're walking through, everything else is just numbers.
Bullish / you think it goes up
A call gives you the right to BUY 100 shares at your strike price before expiration. You want the stock to run above the strike. The higher it climbs, the more your right to buy cheap is worth.
Think of it like: putting a deposit on a house at $300k. The neighborhood blows up and it's worth $400k. Your contract to buy at $300k is now valuable — whether you move in or sell the contract.
Bearish / you think it goes down
A put gives you the right to SELL 100 shares at your strike price before expiration. You want the stock to fall below the strike. The lower it drops, the more your right to sell high is worth.
Think of it like: insurance on a car. If it crashes in value, your policy pays. Puts are how investors protect shares they already own.
Options are quoted per share, but they trade in blocks of 100. That multiplier is where people get burned and where people get paid.
Premium quoted
$2.35 per share
Multiplier
x 100 shares
You actually pay
$235 per contract
You are buying the rights to that contract — the rights to control 100 shares. You are not buying the 100 shares themselves and you are definitely not buying 400 shares. The contract is the product.
The contract has real value if exercised right now. Call: stock is above the strike. Put: stock is below the strike.
Exercising makes no sense right now. Cheaper premiums, lower odds. Most OTM contracts expire worthless.
Intrinsic is the real, in-the-money value. Extrinsic is what you pay for time and volatility — it bleeds away as expiration nears.
Every day your contract loses a bit of value just from the clock ticking. Being right too slow still loses money.
Exercise means actually buying/selling the 100 shares. Most traders never do — they sell the contract to someone else and take the difference.
The buyer pays premium and holds the right. The seller (writer) collects premium and takes the obligation. Selling naked options carries huge risk.