Lesson 2

A contract is a promise

An option is not a stock. It is a written promise about a stock, with an expiry date on it.

Two promises cover almost everything you will see on this desk.

A call is the right to buy 100 shares at a strike price, until a given day. You would only use that right if the stock is above the strike. Otherwise the promise is worthless.

A put is the right to sell 100 shares at a strike. You would only use that if the stock is below the strike.

Every contract has two sides:

• The buyer paid for the right. Their loss is capped at the premium. Their win is the promise paying off.
• The seller collected the premium. They took the other side of the promise. Their win is keeping that premium. Their loss is whatever the buyer gains.

Primer uses European, cash-settled contracts. You cannot exercise early. At expiry the contract turns into cash equal to its intrinsic value, not into shares. That is a teaching cut. Plenty of listed equity options are American and physically settled. The shape of the promise is the same.