An options contract is a standardized agreement that gives the buyer the right — but not the obligation — to buy or sell 100 shares of a specific stock, at a specific price, by a specific date. Every options contract is built from exactly four components: the underlying stock, the strike price, the expiration date, and the premium.
If you already know what calls and puts are, this article goes one level deeper — into the actual anatomy of the contract you'd be buying or selling, and how its price is put together.
The Four Parts of a Contract
| Part | What it means |
|---|---|
| Underlying stock | The company or ETF the contract is based on (e.g. AAPL, SPY) |
| Strike price | The fixed price at which the contract can be exercised |
| Expiration date | The last day the contract exists |
| Premium | The price paid to buy the contract, quoted per share |
You'll see these four combined into a single line almost everywhere options are quoted — for example, "AAPL $230 Call 10/17 — $4.50" tells you the underlying (AAPL), the strike ($230), the expiration (October 17), and the premium ($4.50 per share).
Why One Contract Equals 100 Shares
U.S.-listed equity options are standardized so that one contract always represents 100 shares of the underlying stock. This isn't a choice any individual trader or broker makes — it's set at the exchange level, which is exactly what makes options tradable and comparable across brokers in the first place.
This "multiplier" is why a quoted premium of $2.00 doesn't cost $2.00 — it costs $200 (2.00 × 100 shares). Forgetting the multiplier is one of the most common mistakes beginners make when estimating what a trade will actually cost. See our guide on common mistakes beginner options traders make for more like this.
Intrinsic vs Extrinsic Value
An option's premium is always made up of two components:
- Intrinsic value — what the contract would be worth if exercised right now. For a call, that's (stock price − strike price), if positive; otherwise it's zero. A call is never worth less than its intrinsic value.
- Extrinsic value — everything else in the premium: time remaining until expiration and implied volatility. This is often called "time value," and it's the part that steadily erodes as expiration approaches (a concept we cover in full in what is theta decay).
Premium = Intrinsic Value + Extrinsic Value. Understanding this split is the key to understanding why an option's price can drop even when the stock moves in your favor, if it happens too slowly.
A Full Worked Example
Say a stock is trading at $52. You buy one call option with a $50 strike, expiring in three weeks, for a premium of $3.20.
- Underlying: the stock, currently at $52
- Strike: $50
- Total cost: $3.20 × 100 = $320
- Intrinsic value: $52 − $50 = $2.00 per share ($200 total) — this option is already "in the money"
- Extrinsic value: $3.20 − $2.00 = $1.20 per share ($120 total) — this is the time/volatility premium you're paying on top
If the stock is still at exactly $52 the day before expiration, most of that $1.20 of extrinsic value will have decayed away, and the option will trade much closer to its pure $2.00 intrinsic value — even though the stock price never changed. For the mechanics behind that specific behavior, see what is options premium.
See Real Contracts, Not Just Examples
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