Unit 5 of 15 · Beginner

Calls and puts, rights and obligations

In one read

An option is a contract, not a share. A call gives its buyer the right — never the duty — to buy 100 shares of an underlying at a fixed strike price, with a fixed expiry as the deadline; a put gives the right to sell at the strike. The buyer pays a premium up front for that right and can walk away; the most they lose is the premium. On the other side, the writer collects the premium and takes the obligation: if the buyer exercises, the writer must deliver. That asymmetry — a right on one side, an obligation on the other — is why optionality has a price at all. This unit defines the call and the put, separates the buyer from the writer, and reads a generic contract as what it is: a priced choice about the future, settled on a deadline you agree to at the start.

An option is a priced choice, not a share

A share is ownership. An option is a contract about a share — a right to transact at a fixed price, for a fixed window, that you buy or sell separately from the stock itself.

There are exactly two kinds:

  • A call gives its buyer the right to buy the underlying at a set strike price, with a fixed expiry as the deadline.
  • A put gives its buyer the right to sell the underlying at the strike, on the same terms.

When the right can be used is set by the contract's exercise style: American-style options (most single-stock options) can be exercised any time up to expiry; European-style options (most index options, including the cash-settled contracts) only at expiry itself.

The word doing the work is right. The buyer may exercise, or may let the contract lapse — it is a choice, not an obligation. To hold that choice the buyer pays a premium to the writer (the seller), and one contract normally covers 100 shares.

The two sides are not symmetric. The buyer has a right and a capped loss — the premium, and nothing more. The writer has an obligation: they keep the premium no matter what, but if the buyer exercises, the writer must deliver at the strike. Optionality has a price because someone accepts that obligation.

A worked example

Take a generic stock — call it GENCO — trading at $100. A GENCO $105 call expiring in a month might cost a $2.00 premium, so one contract costs $200 (2.00 × 100 shares).

The buyer's arithmetic is the whole point. If GENCO never rises above $105 by expiry, the right to buy at $105 is worthless and the contract lapses — the buyer loses the $200 premium, no more. If GENCO is above $105, the right to buy at $105 is worth exercising. The writer's position is the mirror: they took the $200 up front and now carry the obligation to sell GENCO at $105 if called. Neither side is predicting GENCO here — they are pricing and taking a defined choice about it.

See it in kestrel

Optionality is easiest to understand against a real session where price actually moves. Run one and watch the underlying that a contract would be written on:

npx kestrel.markets sim fomc-rate-decision-whipsaw

That runs a deterministic simulation over a generic index session — managed licensed data, no wall time, no signup, no card — and prints a certified proof URL. Kestrel's language names options directly (buy 1 atm C is one at-the-money call), so the contract you just read about is a first-class thing the tool can hold. Recompute the whole record on your own machine, byte for byte:

npx kestrel.markets certify https://kestrel.markets/proof/art_d29415f0cf502f4a218a9cba

Keep the contract one command away: drop the kestrel.markets MCP server into your client and the next session opens where this one left off — no account in between.

Recompute it

Every claim in this unit recomputes from a certified proof — no account, no card.

/proof/art_d29415f0cf502f4a218a9cba
Keep readingDelta: direction, hedge, probability

Agent twin: /education/options/opt-what-is-an-option/content.md