A stock option contract is an agreement between a buyer and a seller to buy or sell a stock at a specific price within in a given time frame.
Calls and Puts
There are two types of option contracts: calls and puts. A call option gives the buyer the right to buy the underlying security for a specified price and obliges the call seller to sell the underlying security at that price. A put option gives the buyer the right to sell the underlying security at a specified price and obliges the put seller to buy the underlying security at that price.
The cash price the option buyer pays to the option seller. For example, an option contract that trades for a premium of $1 is worth $100 as each contract covers 100 shares.
The strike price is the pre-determined price at which the option contract becomes exercisable:
For calls, the underlying stock price exceeds the strike price.
For puts, the underlying stock price falls below the strike price.
In /At /Out of the Money
In the Money. When an option contract is worth exercising, it is in the money. A call is in the money when the underlying stock price exceeds the strike price. A put is in the money when the underlying stock price falls below the strike price. Option buyers want the option contracts to be in the money.
At the Money. An option is at the money when the market price equals the strike price.
Out of the Money. An option is out of the money when it is not worth exercising. Option sellers want the option contracts to be out of the money.
Options carry an expiration date which specify the last day the option contract exists. The American options allow buyers to exercise the rights at any time before and including the day of expiration. Any contracts owned that are at least $0.01 in the money at expiration will be automatically exercised. Those at or out of the money at expiration will expire.
The breakeven point is the point at which the investor neither makes nor loses money.
For calls, the breakeven is found by adding the strike price and the premium.
For puts, the breakeven is found by the strike price minus the premium.
9:30 am-4:00 pm ET every trading day until the option is set to be expire.