Strike, Premium and Expiration
Take apart an option contract and see what's written on it: underlying, type, strike price, expiration date, premium and multiplier.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Options Basics, lesson 2: “Strike, Premium and Expiration”
Take apart an option contract and see what's written on it: underlying, type, strike price, expiration date, premium and multiplier.
One contract, six key fields
Underlying, Call / Put, strike price, expiration date, premium, contract multiplier: understand these and you can read any option.
The quote is per share, but you're buying 100 shares
The premium on screen is a per-share price. In the US, 1 contract = 100 shares, so the real cost = premium × 100 × number of contracts.
The further the expiration, the pricier the premium
For the same $105-strike Call (current price $100), the further away the expiration date, the more chances the stock has to rise above $105, so the seller charges a higher premium. Time itself costs money.
Key takeaways
- Strike price: the price at which the contract lets you buy (call) or sell (put).
- Premium: the option's price. One US stock option contract = 100 shares, so total cost = premium × 100.
- Expiration date: the deadline for the right, after which it's worthless. The further away it is, the pricier the premium usually is.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click “Example: quote $2.50”: how much does 1 contract actually cost? Then try changing the number of contracts to 4.
- Under Call, drag the strike from $80 to $120: why does the premium get cheaper and cheaper?
- Keep the strike fixed and switch through 30 / 90 / 365 days: watch the whole bar chart grow taller.
- Switch to Put and drag the strike again: this time, are high strikes or low strikes more expensive?
Quiz and explanations
- 1. The premium is quoted at $2.50. How much does 1 US stock option contract cost?
- Answer: $250.$2.50 × 100 = $250.
- 2. A call with a $100 strike lets you…
- Answer: Buy the stock at $100.A call is the right to buy.
- 3. You buy 3 US stock option contracts quoted at $1.20. How much do you pay in total?
- Answer: $360.$1.20 × 100 shares × 3 contracts = $360.
Terms in this lesson
- call option (Call): The right to buy the underlying at the strike price; the higher the stock goes, the more it's worth.
- expiration date (Expiration): The last day an option is valid; after that, the right is gone.
- multiplier (Multiplier): How much of the underlying one option contract covers; US stock options usually cover 100 shares.
- premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
- put option (Put): The right to sell the underlying at the strike price; the lower the stock goes, the more it's worth.
- strike price (Strike): The price written into an option contract at which you can buy or sell.
- underlying (Underlying): The asset an option contract is based on, such as a particular stock.