01
Calls, Puts, and What You Actually Own
A call gives the buyer the right to buy 100 shares at the strike price before expiration. A put gives the right to sell 100 shares at the strike. The buyer pays a premium for that right; the seller collects the premium and takes on the obligation to deliver.
That asymmetry is the whole thing. A buyer's loss is capped at the premium and their timing has to be right. A seller's gain is capped at the premium and their risk, on a naked call, is theoretically unbounded. Most blowups in options come from people who thought they were collecting income and were actually short a tail.
The multiplier matters too: standard US equity contracts control 100 shares, so a $2.50 premium is $250 per contract, and a one-dollar move in the underlying can be a far larger percentage move in the option. That is leverage, and it works identically in both directions.
02
Premium: Intrinsic Value, Time, and Implied Volatility
Premium splits into intrinsic value — how far in the money the strike already is — and extrinsic value, which is everything the market will pay for the possibility of further movement before expiration. Extrinsic value decays to zero at expiration, always, without exception.
Implied volatility is the market's price for that possibility. When implied volatility is elevated ahead of earnings or a catalyst, you are paying up for expected movement, and if the stock delivers a move smaller than what was priced, the option can lose money even when your direction was right. That is the volatility crush that surprises people every earnings season.
Time decay accelerates as expiration approaches and hits at-the-money contracts hardest. Weekly options are cheap in dollar terms for exactly this reason: you are buying a very short window and paying for it with brutal decay.
03
Expiration, Assignment, and Exercise
In-the-money options are generally exercised automatically at expiration, which means an unclosed long call turns into a stock purchase and an unclosed short put turns into a stock delivery you may not have the buying power to hold. Brokers liquidate positions they cannot support, at their discretion and at market prices.
American-style equity options can be assigned at any time before expiration, and early assignment on short calls clusters around ex-dividend dates. If you sell options, you should know your ex-dividend calendar and your account's exercise cutoff time.
Index options and some products cash-settle instead of delivering shares, and expiration mechanics differ. Read the contract specifications for anything you trade before you hold it into expiration week rather than after.
04
Where New Options Traders Lose Money
Position size measured in contracts rather than in dollars at risk. Ten cheap contracts feel small and can be your whole day's risk budget. Size options by the premium you are fully prepared to write off, because a long option going to zero is an ordinary outcome, not a tail event.
The bid-ask spread. Illiquid strikes on illiquid names can cost several percent on entry and again on exit. Trade contracts with real open interest and use limit orders — a market order in a wide options book is a donation.
And treating premium selling as free money. Selling out-of-the-money options wins most of the time and loses large when it loses, which produces a beautiful equity curve right up until the week it does not. If you sell, define the maximum loss on the position before you open it, not after.