Options: Calls, Puts, Strikes and Expiry
An option is a right with a deadline. Because it expires, its value decays with time as well as moving with price, which is what makes it behave unlike a share.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- A call option is the right to buy at the strike; a put option is the right to sell at the strike.
- Buyers pay a premium and risk it entirely; sellers receive it and take on obligation.
- Time decay works against a buyer every day the position is held.
- Implied volatility is the market's expectation of movement, and it moves independently of price.
- Options data carries information about the equity even for somebody who never trades one.
MAD Academy Training Video · 0:45
A Right, Not an Obligation
An option gives the buyer a choice and the seller a duty, and every strategy is built from that one asymmetry.
This lesson is part of a Stock Alerts + Tools plan.
The four positions
One standard US equity contract covers 100 shares, so a quoted premium of $2.40 costs $240 plus fees. That multiplier is the source of a great deal of accidental position sizing: ten contracts is a thousand shares of exposure, not ten.
Implied volatility
Implied volatility is the movement the option's market price implies participants expect between now and expiry. It rises ahead of scheduled events such as earnings, because the range of plausible outcomes widens, and it typically collapses immediately after the event resolves.
The post-earnings surprise
An option bought before results can lose value even when the stock moves the predicted way, because the collapse in implied volatility after the announcement removes more premium than the price move adds. This catches people out constantly, and it is entirely predictable in advance.
The practical reading is that buying an option before a scheduled event is buying at the most expensive point in its cycle, and the underlying has to move more than the market already expects for the position to work.
Why equity traders watch options anyway
Options data carries information about the equity even for someone who never trades one. Implied volatility gives a market-implied expected move for an upcoming event, which is a direct answer to how large a reaction is already priced.
- Expected move: derived from implied volatility, it frames how big a surprise would have to be to surprise anyone.
- Skew: the gap between put and call pricing describes which tail participants are paying more to hedge.
- Unusual volume in a specific strike: a visible positioning signal, though frequently a hedge rather than a view.
- Open interest at round numbers: large positions can influence how price behaves near expiry.
None of these is a forecast. They describe what other participants have paid for, which is information about positioning rather than about outcomes.
Reading an option chain
An option chain lists every contract available on a security, arranged by expiry and strike. A handful of columns carry most of the information, and knowing which resolves most of what looks like complexity.
| Column | What it says |
|---|---|
| Strike | The price at which the contract can be exercised |
| Bid and ask | The spread, which is frequently wide in percentage terms |
| Last | The most recent trade, which can be hours old on a thin contract |
| Volume | Contracts traded today |
| Open interest | Contracts currently outstanding, which is the better measure of activity |
| Implied volatility | The expected movement the price implies, over the contract's life |
Volume and open interest answer different questions and are frequently confused. Volume resets daily; open interest accumulates and falls as positions are closed, so a strike with high open interest and no volume today has a large existing position and no current activity.
The last price on an options chain is a poor guide to value. Many contracts trade rarely, so the last print can predate a large move in the underlying, and the midpoint of the bid and ask is the more useful figure.
What expiry actually does
Expiry is the point at which a contract's extrinsic value has fully decayed and only intrinsic value remains. Several mechanical consequences follow, and they surprise people who have only held contracts well before expiry.
- An option that is in the money at expiry is generally exercised automatically, which means an equity position appears in the account.
- That position requires capital. An exercised call obliges the buyer to pay the strike price for the shares.
- An option that is out of the money at expiry expires worthless, and the premium paid is the whole loss.
- A short option that is in the money is assigned, and assignment can occur before expiry on an American-style contract.
- The largest expiries, where several contract types expire together, produce substantial mechanical flow in the underlying.
The second point is the one that produces unexpected outcomes. A small options position that finishes in the money can convert into an equity position several times larger than intended, because each contract covers a hundred shares.