Options

An option gives its holder a right under a contract. The buyer pays a premium for that right; the seller takes the corresponding obligation if assigned.

Calls and puts

A call gives the right to buy the underlying at the strike price. A put gives the right to sell it. The contract specifies the underlying, size, expiry and settlement terms. See OIC's options basics.

Expiry and exercise

An American-style option can be exercised before expiry; a European-style option can be exercised only at expiry. These names describe exercise rules, not location. Contracts may settle through delivery or cash. See OIC's contract comparison.

Selling an option you own closes the position. Exercising uses the contract's right. They are different actions.

Payoff and profit

At expiry, a call's payoff per unit is $\max(S-K,0)$; a put's is $\max(K-S,0)$, where $S$ is the underlying price and $K$ the strike. Profit also accounts for the premium, contract size and costs.

Before expiry, an option's price also reflects time remaining and uncertainty. See Pricing and Greeks.

Position risk

An option bought outright can expire worthless, losing the premium. A short option can lose much more than the premium received; an uncovered short call has no fixed upper loss limit. Exercise or assignment can also create an underlying position. See OIC's risk guide.

Moneyness

Being in the money does not imply that the position is profitable. The premium paid can exceed the exercise value.

Reading an option chain

A chain groups quotes by expiry, strike and option type. Check the bid, ask, contract multiplier and settlement terms. Volume counts trading activity during a period; open interest counts outstanding contracts. Neither guarantees that a large order will execute at the displayed price.

Different contracts on the same underlying can have different exercise rules or deliverables. Corporate actions can adjust a contract, so do not infer its size from the symbol alone.

Closing and assignment

A short position is closed by buying the corresponding contract back. A spread's legs can be assigned or exercised separately. Near expiry, this can leave a stock position that the payoff diagram alone does not show.

See Options Strategies for combining contracts and Risk and Position Sizing for measuring the resulting exposure.