--- title: "What Are Stock Options? A Beginner's Guide" description: "Learn what stock options are, how calls and puts work, and key terms every beginner needs. A plain-English guide to options fundamentals." author: "Adrian Rosebrock" date: 2026-04-16 lastmod: 2026-04-16 canonical: https://wheelmetrics.io/blog/what-are-stock-options/ image: https://wheelmetrics.io/blog/what-are-stock-options/header.jpg categories: ["Options Fundamentals"] --- > For the complete WheelMetrics content index, see [llms.txt](https://wheelmetrics.io/llms.txt). This is the Markdown edition of https://wheelmetrics.io/blog/what-are-stock-options/. # What Are Stock Options? A Beginner's Guide By Adrian Rosebrock · Last updated April 16, 2026 · 15 min read When I first stumbled into options trading, I was convinced the entire system was designed to confuse normal people. - Strike prices - Expiration dates - Puts - Calls - Greeks named after a fraternity roster It felt like financial jargon had been weaponized _specifically_ to keep me out. Then I actually learned what a stock option is, and I realized the core concept is embarrassingly simple. **A stock option is a contract that gives you the right, but not the obligation, to buy or sell shares of a stock at a specific price by a specific date.** That single sentence is the entire foundation. Everything else is detail and nuance. I came to options through [The Wheel Strategy](https://wheelmetrics.io/blog/wheel-strategy-guide/), which uses options to generate income on stocks you want to own. Before I could run that system with any discipline, I needed to understand options from the ground up. This is the starting point I wish I'd had. **Table of Contents** - [What Are Stock Options?](https://wheelmetrics.io/blog/what-are-stock-options/#what-are-stock-options) - [The Ice Cream Analogy](https://wheelmetrics.io/blog/what-are-stock-options/#the-ice-cream-analogy) - [What Is the Difference Between Calls and Puts?](https://wheelmetrics.io/blog/what-are-stock-options/#what-is-the-difference-between-calls-and-puts) - [Call Options](https://wheelmetrics.io/blog/what-are-stock-options/#call-options) - [Put Options](https://wheelmetrics.io/blog/what-are-stock-options/#put-options) - [Buying vs. Selling Options (and Why It Matters)](https://wheelmetrics.io/blog/what-are-stock-options/#buying-vs-selling-options-and-why-it-matters) - [Buy a Call](https://wheelmetrics.io/blog/what-are-stock-options/#buy-a-call) - [Buy a Put](https://wheelmetrics.io/blog/what-are-stock-options/#buy-a-put) - [Sell a Call](https://wheelmetrics.io/blog/what-are-stock-options/#sell-a-call) - [Sell a Put](https://wheelmetrics.io/blog/what-are-stock-options/#sell-a-put) - [The Distinction You Need](https://wheelmetrics.io/blog/what-are-stock-options/#the-distinction-you-need) - [How the Wheel Strategy Uses Buying and Selling](https://wheelmetrics.io/blog/what-are-stock-options/#how-the-wheel-strategy-uses-buying-and-selling) - [Key Options Terms You Need to Know](https://wheelmetrics.io/blog/what-are-stock-options/#key-options-terms-you-need-to-know) - [What Is a Strike Price?](https://wheelmetrics.io/blog/what-are-stock-options/#what-is-a-strike-price) - [What Is an Expiration Date?](https://wheelmetrics.io/blog/what-are-stock-options/#what-is-an-expiration-date) - [What Is an Options Premium?](https://wheelmetrics.io/blog/what-are-stock-options/#what-is-an-options-premium) - [What Is Contract Size?](https://wheelmetrics.io/blog/what-are-stock-options/#what-is-contract-size) - [What Do ITM, OTM, and ATM Mean?](https://wheelmetrics.io/blog/what-are-stock-options/#what-do-itm-otm-and-atm-mean) - [Why Do Stock Options Exist?](https://wheelmetrics.io/blog/what-are-stock-options/#why-do-stock-options-exist) - [Common Misconceptions About Stock Options](https://wheelmetrics.io/blog/what-are-stock-options/#common-misconceptions-about-stock-options) - [“Options Are Gambling”](https://wheelmetrics.io/blog/what-are-stock-options/#options-are-gambling) - [“Options Are Too Risky for Normal People”](https://wheelmetrics.io/blog/what-are-stock-options/#options-are-too-risky-for-normal-people) - [“You Can Lose Everything with Options”](https://wheelmetrics.io/blog/what-are-stock-options/#you-can-lose-everything-with-options) - [Where to Go from Here](https://wheelmetrics.io/blog/what-are-stock-options/#where-to-go-from-here) ## What Are Stock Options? > _**A stock option is a contract that gives you the right, but not the obligation, to buy or sell shares of a stock at a specific price by a specific date.**_ So what does "the right but not the obligation" actually _mean?_ "Right" means you _can_ do something. You have permission, but you don't _have_ to. "Obligation" means you _must_ do something. No choice. As a kid, you likely had the _option_ to go outside and play after doing your homework. But, at the end of the night, you had the _obligation_ to brush your teeth before bed. - **When you buy an option, you're paying for the right.** You choose whether to use it or let it expire. - **When you sell an option, you're taking on the obligation.** If the buyer exercises their right, you must fulfill your end of the deal. **This asymmetry is what makes options work.** One side has flexibility. The other has responsibility. The price you pay (or receive) for this right is called the _premium_ (think of it like an entry fee). ### The Ice Cream Analogy Here's a non-financial way to think about it. Imagine it's winter and your favorite ice cream shop sells scoops for $3. You pay the shop $0.50 _now_ for the right to buy a scoop at $3 anytime before August. Summer comes. Demand spikes. The price goes to $6. But you still have the right to buy at $3. You exercise your right and get $6 ice cream for $3 (minus the $0.50 you paid for the right). Or maybe it's a cool summer and ice cream stays at $3. Your right isn't worth exercising, and you're out the $0.50 premium. The shop? They collected $0.50 from you upfront and took on the _obligation_ to honor that $3 price no matter what. Stock options work the same way, but instead of ice cream you're dealing with 100 shares of a stock, a strike price, and an expiration date. ## What Is the Difference Between Calls and Puts? | Concept | Call Option | Put Option | |---------|------------|------------| | Gives you the right to... | Buy shares at the strike price | Sell shares at the strike price | | You profit when... | Stock goes up | Stock goes down | | You lose when... | Stock goes down or stays flat | Stock goes up or stays flat | | Think of it as... | A bullish bet | A bearish bet (or insurance) | There are two types of stock options: 1. Calls 2. Puts Let's break them down. ### Call Options ![CDE options chain showing calls and puts side by side for the Apr 17 2026 expiration](https://wheelmetrics.io/blog/what-are-stock-options/cde-calls-and-puts.png) A call gives you the right to _**buy**_ 100 shares at the strike price before expiration. Here's a simple example using `CDE` (Coeur Mining), which is trading around $22: - You buy a `CDE` $22.50 call for $2.20 - The stock goes to $27 - Your call is now worth significantly more than the $2.20 you paid - You profit If the stock stays flat or drops? The call expires worthless, and you lose the $220 premium (that's $2.20 x 100 shares). ### Put Options A put gives you the right to _**sell**_ 100 shares at the strike price before expiration. Same stock, opposite direction: - You buy a `CDE` $22.50 put for $2.41 - The stock drops to $17 - Your put is now worth significantly more than the $2.41 you paid - You profit If the stock stays flat or goes up? The put expires worthless, and you lose the $241 premium. ## Buying vs. Selling Options (and Why It Matters) ![Make a deal](https://wheelmetrics.io/blog/what-are-stock-options/handshake.jpg) So far we've talked about _buying_ options. **But options can also be _sold_, just like how we can short a stock.** This is where things get interesting (and where the Wheel Strategy lives). | Scenario | Right or Obligation? | You Profit When... | Max Risk | |----------|---------------------|--------------------|----------| | Buy a Call | Right to buy shares | Stock goes up above strike + premium paid | Premium paid (limited) | | Buy a Put | Right to sell shares | Stock goes down below strike - premium paid | Premium paid (limited) | | Sell a Call | Obligation to sell shares if exercised | Stock stays below strike (keep premium) | Unlimited (at least in theory) | | Sell a Put | Obligation to buy shares if exercised | Stock stays above strike (keep premium) | Strike price x 100 - premium received | Let's walk through each scenario using the `CDE` example. ### Buy a Call You pay a premium for the _right_ to buy 100 shares at the strike price. You're bullish. You think the stock is going up. - You buy a `CDE` $22.50 call for $2.20 - You profit if `CDE` goes above $24.70 (strike + premium) before expiration - Max risk: the $240 premium you paid ### Buy a Put You pay a premium for the _right_ to sell 100 shares at the strike price. You're bearish, or you're buying insurance on shares you already own. - You buy a `CDE` $22.50 put for $2.41 - You profit if `CDE` drops below $20.09 (strike - premium) before expiration - Max risk: the $241 premium you paid ### Sell a Call You _collect_ a premium and take on the _obligation_ to sell 100 shares at the strike price if the buyer exercises. You're neutral-to-slightly-bearish. You think the stock will stay flat or go down. - You sell a `CDE` $25 call for $1.36 - You keep the $136 premium if `CDE` stays below $25 by expiration - Max risk: unlimited (the stock can rise indefinitely), which is why most traders sell calls only when they already own the shares (a "covered" call) ### Sell a Put You collect a premium and take on the _obligation_ to buy 100 shares at the strike price if the buyer exercises. You're neutral-to-slightly-bullish. You think the stock will stay flat or go up. - You sell a `CDE` $20 put for $1.24 - You keep the $124 premium if `CDE` stays above $20 by expiration - Max risk: $20 x 100 - $124 = $1,876 (if the stock goes to $0, which is...unlikely, but that's the math) ### The Distinction You Need **Buyers pay premium for flexibility (rights). Sellers collect premium for taking on responsibility (obligations).** That distinction is the single most important concept in all of options trading. ### How the Wheel Strategy Uses Buying and Selling If you're learning about options because of the Wheel Strategy, here's the thing: you'll primarily be on the _selling_ side. The Wheel uses two of the four scenarios above: - **Selling puts** (cash-secured puts) to collect premium on stocks you're willing to own - **Selling calls** (covered calls) against shares you already hold to collect more premium You sell puts to get paid while waiting for a stock you want. If assigned, you sell calls against those shares for additional income. **This is why the buyer vs. seller distinction matters.** As a Wheel trader, you need to understand the obligations you're taking on. For a deeper dive into how the Wheel works, see the [Wheel Strategy complete guide](https://wheelmetrics.io/blog/wheel-strategy-guide/). ## Key Options Terms You Need to Know These are the terms you'll see every time you open an options chain. We'll keep the definitions practical, with real examples from a brokerage account. For a deeper look at [how options contracts work](https://wheelmetrics.io/blog/options-contracts-strike-expiration-premium/), we go through strike, expiration, and premium one at a time. ### What Is a Strike Price? ![CDE options chain showing put strike prices from $12.50 to $35.00 with bid and ask columns](https://wheelmetrics.io/blog/what-are-stock-options/cde-strikes.png) The strike price is the price at which you can buy (call) or sell (put) the underlying stock. In the screenshot above, you can see strike prices ranging from $12.50 all the way up to $35.00 for `CDE` puts. With `CDE` trading around $22, the $22.50 strike is close to the current stock price. The $20 strike is below it. The $25 strike is above it. Each strike has a _different premium_ because each carries a _different probability_ of ending up in the money (we'll get to what "in the money" means shortly). ### What Is an Expiration Date? ![CDE options chain showing multiple expiration dates with days to expiration](https://wheelmetrics.io/blog/what-are-stock-options/cde-options-available.png) The expiration date is the date by which the option must be exercised, or it expires worthless. Think of it as a countdown timer. Once it hits zero, the option ceases to exist. The screenshot above shows several available expirations for `CDE`: - Mar 13, 2026 (2 days) - Mar 20, 2026 (9 days) - Mar 27, 2026 (16 days) - Apr 02, 2026 (22 days) - Apr 10, 2026 (30 days) - Apr 17, 2026 (37 days) - Apr 24, 2026 (44 days) _"Fri: 30 days"_ means the option expires on a Friday, 30 days from now. Most options expire on Fridays (with occasional exceptions for holidays). ### What Is an Options Premium? The premium is the price you pay (as a buyer) or collect (as a seller) for the option contract. Remember the `CDE` strike price screenshot from a moment ago? The bid and ask columns _are_ the premium. Here's how to read them using the $20 strike put: - The **ask is $1.25** — that's what you'd pay to _buy_ one contract: $1.25 x 100 = **$125** - The **bid is $1.15** — that's what you'd receive if _selling_ one contract: $1.15 x 100 = **$115** The bid is always lower than the ask. **The difference between them is called the _spread_, and it's the cost of doing business.** ### What Is Contract Size? One options contract represents 100 shares of the underlying stock. This is why options are leveraged. A small move in the stock price gets multiplied by 100. If a premium is quoted at $1.50 per share, one contract actually costs $150 (not $1.50). **This trips up beginners constantly.** The prices displayed in the options chain are _per-share_, but you always trade in 100-share blocks. Forget this, and your position will be 100x larger (or smaller) than you intended. ### What Do ITM, OTM, and ATM Mean? These three abbreviations describe the relationship between the stock price and the strike price. - **ITM (In the Money):** the option has intrinsic value right now - Call: stock price is _above_ the strike price - Put: stock price is _below_ the strike price - **OTM (Out of the Money):** the option has _no_ intrinsic value right now. - Call: stock price is _below_ the strike price - Put: stock price is _above_ the strike price - **ATM (At the Money):** the stock price is at or very near the strike price. Let's make this concrete with `CDE` at around $22: - The **$20 put is OTM** — the stock is above the $20 strike, so the put has no intrinsic value. The $20 put bid of $1.15? That's _all_ time/optionality value - The **$25 put is ITM** — the stock is below the $25 strike, so the put has roughly $3 of intrinsic value. The $25 put bid of $3.80 confirms this ($3 intrinsic + $0.80 time value) - The **$22.50 strike is roughly ATM** — closest to where the stock is currently trading **The deeper an option is in the money, the more expensive it is** (because it _already_ has built-in value). The deeper it's out of the money, the cheaper it is (because it needs a bigger move to become profitable). If that feels like a lot of terminology, you're right. But you just covered the vocabulary you'll use for literally every options trade you'll ever place. ## Why Do Stock Options Exist? ![Tools](https://wheelmetrics.io/blog/what-are-stock-options/tools.jpg) Options are a flexible financial tool used for very different purposes. Here are the four main reasons options exist: 1. **Hedging / Insurance:** Protect a stock position from downside risk (buy a put as insurance in case the stock drops) 2. **Speculation:** Bet on a stock's direction with less capital upfront than buying shares outright 3. **Income generation:** Sell options to collect premium as recurring income (this is where the Wheel Strategy lives) 4. **Leverage:** Control 100 shares for a fraction of the cost of buying them, amplifying both gains and losses Beyond these purposes, there are literally _hundreds_ (if not _thousands_) of strategies that use options in different combinations: - **Buying calls:** Bullish bet; limited risk, unlimited upside - **Buying puts:** Bearish bet or insurance; limited risk - **Covered calls:** Sell calls against shares you own to generate income - **Cash-secured puts:** Sell puts on stocks you're willing to buy, collect premium while you wait (i.e., get paid to "wait" for a limit order to be filled) - **Spreads:** Combine buying and selling to define your risk and reward more precisely - **Iron condors:** Profit when a stock stays in a range; defined risk on both sides _**You don't need to learn all of these.**_ The point is that options are a broad toolkit, and different strategies serve different goals. **If you're here because of the Wheel Strategy, you really only need two of them: cash-secured puts and covered calls.** The rest is good to know, but not essential for getting started. ## Common Misconceptions About Stock Options ![Gambling](https://wheelmetrics.io/blog/what-are-stock-options/gambling.jpg) We cover more misconceptions (and the mistakes that flow from them) in our guide on the [common options trading mistakes to avoid](https://wheelmetrics.io/blog/options-trading-mistakes-wheel-strategy/). I've heard all three of these. I believed at least two of them before I knew better. ### "Options Are Gambling" Are options gambling? It depends entirely on the strategy. Buying super far out-of-the-money options? Working with 0 DTE options? In my opinion, that is the equivalent to gambling. Most expire worthless, and you're betting on a specific short-term move with the odds stacked against you. Selling cash-secured puts on quality stocks you genuinely want to own? That's closer to selling insurance. You collect premium upfront and only buy shares at a price _you_ chose in advance. **The instrument isn't the problem. How you use it determines whether it's "speculation" or a "disciplined strategy."** ### "Options Are Too Risky for Normal People" Options _can_ be risky. So can buying individual stocks. _So can crossing the street without looking._ The risk comes from leverage: one contract controls 100 shares, so a $1 move in the stock equals a $100 swing in the option's value. That leverage amplifies both gains _and_ losses, which is why options _feel_ volatile. **But risk is manageable when you understand what you're doing and choose strategies that match your risk tolerance.** ### "You Can Lose Everything with Options" **If you're buying options, the most you can lose is the premium you paid.** That's it. Defined risk. **If you're selling options, the risk profile depends on the strategy:** - Selling naked calls has theoretically unlimited risk - Selling cash-secured puts has the same risk as buying the stock at the strike price (the stock can go to zero, but you chose the strike, so you should have picked a price you were comfortable with) **Know your max risk _before_ you enter a trade.** If you can't articulate your worst-case scenario in one sentence, you shouldn't be in the position. Options aren't inherently dangerous or safe. The strategy you choose and the discipline you bring determine the outcome. ## Where to Go from Here Quick recap of what you just learned: - Stock options give you the right (not the obligation) to buy or sell shares at a set price by a set date - Calls = right to buy, puts = right to sell - You can remember the difference between calls and puts by using the phrase: _"I want to 'call up' an option"_ (meaning you want the price to _go up_), and _"I want to 'put down' an option"_ (meaning you want the price to _go down_) - Buyers pay premium for rights, sellers collect premium for obligations This article is one piece of the larger [Options Fundamentals: The Complete Guide](https://wheelmetrics.io/blog/options-fundamentals-complete-guide/), which ties the whole learning path together. Your next steps in the learning path: 1. [**Understanding Options Contracts: Strike, Expiration, Premium**](https://wheelmetrics.io/blog/options-contracts-strike-expiration-premium/): Go deeper on the mechanics of how contracts work 2. [**How to Read an Options Chain**](https://wheelmetrics.io/blog/how-to-read-options-chain/): Learn to navigate the screen you'll use for every trade 3. [**The Options Greeks Explained: Delta, Theta, Gamma, Vega**](https://wheelmetrics.io/blog/options-greeks-explained/): Understand the forces that move option prices These are all part of the Options Fundamentals learning path. Start with options contracts, then work your way through the chain and the Greeks. The hardest part of learning options is getting started. You just did. ## Frequently Asked Questions **What is a stock option?** A stock option is a contract that gives you the right, but not the obligation, to buy or sell shares of a stock at a specific price by a specific date. You pay a premium for this right. One contract controls 100 shares of the underlying stock. **What is the difference between a call and a put?** A call option gives you the right to buy shares at the strike price before expiration — you profit when the stock goes up. A put option gives you the right to sell shares at the strike price before expiration — you profit when the stock goes down. **How much does it cost to buy an option?** You pay the premium, which varies based on the strike price, expiration date, and implied volatility. Prices in the options chain are listed per share, but one contract controls 100 shares — so a $1.50 premium actually costs $150 per contract. **Can you lose more than you invest with options?** If you are buying options, no — your maximum loss is the premium you paid. If you are selling options, the risk depends on the strategy. Selling naked calls has theoretically unlimited risk, while selling cash-secured puts has the same risk profile as buying the stock at the strike price. **Are stock options gambling?** Not inherently. Buying far out-of-the-money weeklies is closer to gambling (most expire worthless). Selling cash-secured puts on quality stocks is closer to selling insurance. The instrument is not the problem — the strategy and discipline you bring determine the outcome. **What does 'in the money' mean?** An option is in the money (ITM) when it has intrinsic value. For calls, this means the stock price is above the strike price. For puts, it means the stock price is below the strike price. ITM options are more expensive because they already have built-in value. **What is a strike price?** The strike price is the price at which you can buy (for calls) or sell (for puts) the underlying stock when exercising the option. It is the predetermined price locked into the contract when the option is created. **What is an options premium?** The premium is the price paid by the buyer (or collected by the seller) for the option contract. It represents the cost of the right the option provides. Premiums are quoted per share, so multiply by 100 to get the actual cost per contract. **How do stock options relate to the Wheel Strategy?** The Wheel Strategy uses two specific options strategies: (1) selling cash-secured puts to collect premium on stocks you are willing to own, and (2) selling covered calls against shares you already hold to collect additional premium. Both are on the selling side of the options market. **Do I need a lot of money to trade options?** One contract controls 100 shares, so capital requirements depend on the stock price. A $20 stock requires $2,000 in buying power for one cash-secured put contract. Lower-priced stocks require less capital, but the minimum viable account for a disciplined approach is typically around $10,000. ## Related articles - [Understanding Delta: The Most Important Greek for The Wheel Strategy](https://wheelmetrics.io/blog/understanding-delta-wheel-strategy/) - [The Options Greeks Explained: Delta, Theta, Gamma, Vega](https://wheelmetrics.io/blog/options-greeks-explained/) - [How to Read an Options Chain](https://wheelmetrics.io/blog/how-to-read-options-chain/) ## About the author **Adrian Rosebrock**, Founder, WheelMetrics. Hi there, I'm Adrian Rosebrock, PhD. I believe trading and investing should be systematic, not speculative. I built WheelMetrics to share the quantitative research and frameworks behind my Wheel Strategy process. My goal is to help you make smarter, more confident trading decisions. [Connect on LinkedIn](https://www.linkedin.com/in/adrian-rosebrock/) ## Disclaimer WheelMetrics is an educational resource, not financial advice. WheelMetrics is not a registered investment advisor, broker-dealer, or financial planner. Everything here, including articles, newsletters, stock screening results, options setups, market commentary, is for educational and informational purposes only. Options trading carries substantial risk, and you can lose some or all of your capital. You're solely responsible for your own investment decisions. Consult with a qualified financial advisor before making any trades. --- *WheelMetrics content is educational and is not individualized financial advice. Source: https://wheelmetrics.io/blog/what-are-stock-options/*