Option contract
Also known as: options contract, equity option
An option contract gives its owner the right — but not the obligation — to buy or sell an underlying asset at a set price before expiration. A standard equity option contract covers 100 shares of the underlying stock.
An option contract is a derivative: its value comes from an underlying asset, most commonly 100 shares of a stock. A call option gives the owner the right to buy the underlying at a fixed strike price; a put option gives the right to sell at the strike. The buyer pays a premium for that right, while the seller (writer) collects the premium and takes on the matching obligation.
Every listed option is defined by four standardized terms: the underlying security, the contract size (100 shares for standard equity options), the strike price, and the expiration date. Because premiums are quoted per share, a quote of $2.50 means one contract costs $250. If a stock splits or pays a stock dividend, the contract terms adjust so neither side gains or loses from the corporate action.
Listed options are issued and guaranteed by the Options Clearing Corporation (OCC), which stands between every buyer and seller. That standardization and guarantee are what make exchange-traded options liquid — a holder can close a position any time by trading out of it rather than waiting for expiration or exercising.
Options are among the most heavily tested topics on securities exams. The SIE covers contract basics and terminology, while the Series 7 and Series 9 go deeper into strategies, adjustments, and index options. Start by mastering the anatomy of a single contract — rights versus obligations, the 100-share multiplier, and premium math — because every strategy question builds on it.
Key takeaways
- An option contract conveys the right (buyer) and obligation (writer) to buy or sell an underlying asset at the strike price before expiration.
- A standard equity option contract covers 100 shares, so a $2.50 quoted premium costs $250 per contract.
- Calls convey the right to buy; puts convey the right to sell.
- The Options Clearing Corporation issues and guarantees listed options, and contract terms adjust for stock splits and stock dividends.
- The SIE, Series 7, and Series 9 exams all test option contract mechanics before layering on strategy questions.