Quick Answer
A call is the right to buy 100 shares at the strike; a put is the right to sell 100 shares at the strike. The buyer holds the rights and pays the premium; the writer accepts the obligation and collects it. The Options Clearing Corporation (OCC) issues and guarantees every listed contract, and premium equals intrinsic value plus time value.
The whole unit on one sheet: rights versus obligations, how contracts price and adjust, who guarantees them, and the limits and account rules the exam loves.
Calls vs. Puts: Rights and Obligations
- Call: buyer has the right to buy 100 shares at the strike; writer has the obligation to sell if assigned. Call buyer is bullish; call writer is bearish to neutral.
- Put: buyer has the right to sell 100 shares at the strike; writer has the obligation to buy if assigned. Put buyer is bearish; put writer is bullish to neutral.
- Rights belong to the buyer; obligations belong to the seller. The buyer always pays the premium; the seller always receives it.
- Each contract covers 100 shares. The only negotiated term is the premium; the exchange standardizes everything else, making options fungible.
The One-Liners That Win Points
- OCC = issuer AND guarantor of every listed option. It interposes itself as buyer to every seller and seller to every buyer, eliminating counterparty risk. The exchange is the marketplace; the OCC provides the contract.
- Exercise is always the holder's choice; assignment is involuntary and random. The OCC assigns randomly to a member firm, which then assigns to a customer by random selection or first-in, first-out (FIFO).
- Premium = Intrinsic Value + Time Value. Intrinsic value can never be negative (floor is zero). Time value is highest at the money and erodes as expiration nears (time decay, or theta); at expiration time value is zero.
- Opening transactions increase open interest; closing transactions decrease it. Open interest only rises when both sides open, only falls when both sides close, and is unchanged when the contract just changes hands.
- Equity options settle by physical delivery of stock; index options settle in cash.
- The most common way to exit is a closing transaction; most options are not exercised.
Numbers to Lock In
| Item | Value |
|---|---|
| Standard equity contract size | 100 shares |
| Index / yield-based contract multiplier | $100 |
| Foreign currency contract size | 10,000 units (Japanese yen: 1,000,000) |
| Exercise limit window | 5 consecutive business days (equal to position limits) |
| Position limit tiers | 250,000 / 200,000 / 75,000 contracts |
| Standard expiration | Third Friday of the expiration month |
| LEAPS expiration | Third Friday of January, up to about 3 years out |
| Signed options agreement return | within 15 days of account approval |
| Pre-ODD communications filing | at least 10 calendar days before use |
| Yield-based strike conversion | strike of 35 = 3.5% yield (decimal one place left) |
Memory Aid: Call Up, Put Down
A call is in the money when the stock goes up above the strike; a put is in the money when the stock goes down below the strike. The same shorthand gives breakeven: call breakeven = strike + premium; put breakeven = strike - premium.
Moneyness at a Glance
- In the money (ITM): call when market price is above strike; put when market price is below strike. This is the only status with intrinsic value.
- At the money (ATM): market price equals strike; maximum time value.
- Out of the money (OTM): call when market price is below strike; put when market price is above strike. Intrinsic value is zero, but the premium is entirely time value.
Top Gotchas
- Premiums are quoted per share, not per contract. A call trading at 4 costs $400 (4 x 100 shares).
- Ordinary cash dividends do NOT adjust contracts. Only stock dividends and stock splits trigger adjustments; even splits change the number of contracts, odd splits change the deliverable per contract.
- Cash dividends do affect premiums: on the ex-date, calls decrease and puts increase in value.
- Early exercise of a call is almost always dividend capture. It happens the day before the ex-dividend date on a deep-ITM call whose remaining time value is less than the dividend; the short call writer faces the highest assignment risk then.
- Position limits aggregate the same side: long calls + short puts (bullish), long puts + short calls (bearish). Add each side separately, not all four types.
- American vs. European is exercise style, not geography. American exercises any business day up to expiration; European only at expiration. Equity options are American; broad-based index options are European.
- LEAPS are ordinary options with a longer life, cleared by the OCC under the same rules; holders receive no dividends or voting rights.
- Foreign currency options are European-style but settle by physical delivery; yield-based options are European-style and settle in cash and move with yields, so a long yield-based call profits when rates rise.
- Account approval sequence: gather the customer's financial and background information, deliver the OCC Options Disclosure Document (ODD) at or before approval (a hyperlink satisfies it), and have a Registered Options Principal (ROP) approve in writing. Miss the 15-day agreement return and the account is restricted to closing transactions only (not frozen, not liquidated).
One-Breath Recap
A call is the right to buy and a put is the right to sell 100 shares at the strike, with rights on the buyer and obligations on the writer, all issued and guaranteed by the OCC. Premium splits into intrinsic value (never negative) plus time value (highest at the money, gone at expiration), and moneyness flips between calls and puts. Lock in the position and exercise limits, the American-versus-European styles, the dividend-driven early-exercise setup, and the account-approval steps (ODD at or before approval, signed agreement back within 15 days) and this unit answers itself.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Options Fundamentals unit for the complete lesson.