Contract Anatomy & Moneyness

Anatomy of an options contract

Let’s look at what an options contract typically looks like:

Long 1 ABC Jan 40 call @ $5

To understand what this means, break the contract into its parts.

🔑 Premium math:

• Premiums are quoted per share.
• To find the contract’s total cost, multiply the premium by 100.

To summarize, here’s the contract again:

Long 1 ABC Jan 40 call @ $5

This investor is long one contract that gives them the right to buy 100 shares of ABC stock at $40 per share. The cost of the contract was $500.

Calls and puts are the two types of options contracts available to investors. They provide different rights and obligations, but otherwise work in similar ways. You’ll want to know how each option operates and how investors use them.

Calls

Calls are contracts that provide the right to buy an asset at a fixed price (the strike price). If you buy an equity call, you gain the right to buy stock at the strike price.

A call is typically exercised only if the stock’s market price rises above the strike price. For example, a 40 call (right to buy at $40) would be exercised if the stock’s market price were above $40.

To satisfy the holder’s right, call writers are obligated to sell stock at the strike price.

Let’s walk through a few examples:

1 ABC Jan 40 call @ $5 while the market price is $39

In this scenario:

• The option holder (buyer) pays $500 to gain the right to buy 100 shares of ABC stock at $40.
• The option writer (seller) receives the $500 premium.
• If the holder exercises, the writer must sell 100 shares at $40.

The contract expires on the third Friday in January at 11:59pm ET. The market price of $39 is just context for ABC’s current price and doesn’t change the contract terms.

Call, market rises

1 ABC Jan 40 call @ $5 while the market price is $39. The market price subsequently rises to $60.

The contract now has $20 of intrinsic value and will be exercised. How much does the holder gain or lose?

Answer = $1,500 gain

Action	Result
Buy call	-$500
Exercise - buy shares	-$4,000
Sell shares	+$6,000
Total	+$1,500

Calls go “in the money” (gain intrinsic value) when the market rises. If the holder exercises and buys 100 shares at $40, they can sell those shares in the market at $60. That’s a $20 per share gain, or $2,000 total. After subtracting the $500 premium paid, the net gain is $1,500.

How about the writer?

Answer = $1,500 loss

Action	Result
Sell call	+$500
Buy shares	-$6,000
Assigned - sell shares	+$4,000
Total	-$1,500

When the market price increases to $60, the call becomes in the money and is exercised. The writer is assigned and must deliver 100 shares at $40 per share. If the writer doesn’t already own the stock, they must buy 100 shares in the market at $60 and then sell them at $40 through assignment. That’s a $20 per share loss ($2,000 total), partially offset by the $500 premium received, for a net loss of $1,500.

Call, market falls

Now let’s see what happens if the market moves the other way.

1 ABC Jan 40 call @ $5 while the market price is $39. The market price subsequently falls to $35.

The contract has no intrinsic value and will expire. How much does the holder gain or lose?

Answer = $500 loss

Action	Result
Buy call	-$500
Total	-$500

When the market falls to $35, the call is out of the money and has no intrinsic value. The holder wouldn’t exercise the right to buy at $40 when the market is offering the stock at $35. The option expires unused, so the premium paid ($500) is the holder’s total loss.

How about the writer?

Answer = $500 gain

Action	Result
Sell call	+$500
Total	+$500

The holder’s loss is the writer’s gain. When a call expires out of the money, the writer keeps the premium and doesn’t have to take any further action.

Puts

Puts are contracts that provide the right to sell at a fixed price (the strike price). Investors who buy equity puts gain the right to sell stock at the strike price.

A put is typically exercised if the stock’s market price falls below the strike price. For example, a 70 put (right to sell at $70) would be exercised if the stock’s market price were below $70.

To satisfy the holder’s right, put writers are obligated to buy stock at the strike price.

Let’s walk through a few examples:

1 BCD Aug 70 put @ $3 while the market price is $71

In this scenario:

• The holder pays $300 to gain the right to sell 100 shares of BCD stock at $70.
• The writer receives $300.
• If the holder exercises, the writer must buy 100 shares at $70.

The contract expires on the third Friday in August at 11:59pm ET. The market price of $71 is just context for BCD’s current price and doesn’t change the contract terms.

Put, market falls

1 BCD 70 put @ $3 while the market price is $71. The market subsequently falls to $55.

What is the gain or loss for the holder?

Answer = $1,200 gain

Action	Result
Buy put	-$300
Buy shares	-$5,500
Exercise - sell shares	+$7,000
Total	+$1,200

Puts go “in the money” (gain intrinsic value) when the market falls. Here, the holder can buy 100 shares in the market at $55, then exercise the put and sell those shares at $70. That’s a $15 per share gain ($1,500 total). After subtracting the $300 premium paid, the net gain is $1,200.

How about the writer?

Answer = $1,200 loss

Action	Result
Sell put	+$300
Exercise - buy shares	-$7,000
Sell shares	+$5,500
Total	-$1,200

With the contract $15 in the money, it is assigned. The writer must buy 100 shares at $70. Many put writers don’t want to keep the stock, so they may sell it in the market at $55. That creates a $15 per share loss ($1,500 total), partially offset by the $300 premium received, for a net loss of $1,200.

Put, market rises

Now let’s see what happens if the market moves in the opposite direction.

1 BCD Aug 70 put @ $3 while the market price is $71. The market price subsequently rises to $80.

How much does the holder gain or lose?

Answer = $300 loss

Action	Result
Buy put	-$300
Total	-$300

When the market rises to $80, the put is out of the money and has no intrinsic value. The holder wouldn’t exercise the right to sell at $70 when the market is offering $80. The option expires unused, so the premium paid ($300) is the holder’s total loss.

How about the writer?

Answer = $300 gain

Action	Result
Sell put	+$300
Total	+$300

The holder’s loss is the writer’s gain. When a put expires out of the money, the writer keeps the premium and doesn’t have to take any further action.

⚠️ Four-position master table (built from this page’s statements)

⚠️ ITM / ATM / OTM — calls vs. puts (mirror images)

Swaps

Swaps are derivative contracts typically traded over the counter (OTC). Institutions use swaps to hedge or speculate on changes in financial variables like interest rates, currencies, or credit risk. Swaps are not traded on an exchange; instead, they are negotiated privately between parties. This allows customization, but it also introduces counterparty risk. Common swap types are interest rate or currency swaps, where principal and interest payments in different currencies are exchanged. ⚠️ Swaps are unsuitable for retail investors; they are used mainly by institutional investors.

Key points

Option contracts

• Cover 100 shares of stock
• Strike price is the fixed exercise price
• Premium is in multiples of 100

Call options

• Holders have the right to buy
• Writers have the obligation to sell
• In the money (ITM) when the market rises above the strike price
• Out of the money (OTM) when the market falls below the strike price
• Holders seek ITM options
• Writers seek OTM options

Put options

• Holders have the right to sell
• Writers have the obligation to buy
• In the money (ITM) when the market falls below the strike price
• Out the money (OTM) when the market rises above the strike price
• Holders seek ITM options
• Writers seek OTM options

Swaps

• Derivative contracts typically traded over the counter (OTC)
• used to hedge or speculate on changes in financial variables

Sources

Primary/official references for the material in this chapter. Every link was fetched and returned HTTP 200 on 2026-08-15.