Published July 26, 2026
Options 101: the concepts, explained with pictures
A visual introduction to options: calls and puts, strike, expiration and premium, buyers versus sellers, moneyness, and how it all leads into the wheel.
What an option is
An option is a contract between two traders about a stock (the underlying). It gives the buyer a right — but not an obligation — to trade 100 shares at a fixed price before a deadline. The seller takes on the matching obligation and is paid for it.
There are only two basic types. A call is about buying shares; a put is about selling shares. Everything else in options builds on these two.
The parts of an option contract
Every option quote packs a few key terms together. The underlying is the stock the option is written on. The strike is the fixed price you can trade at. The expiration is the date the option stops existing. The premium is the price you pay as a buyer or collect as a seller, quoted per share.
One standard contract controls 100 shares, so a premium of $3.20 means $320 for a single contract.
1 contract = 100 shares · premium $3.20 = $320 per contract
Call options
A call buyer pays premium for the right to buy shares at the strike. If the stock rises well above the strike, the call gains value; if it stays below, the most the buyer can lose is the premium paid.
The payoff looks like a hockey stick: a flat loss below the strike, then rising profit above it.
Put options
A put buyer pays premium for the right to sell shares at the strike. Puts gain value when the stock falls below the strike, and again the buyer's loss is capped at the premium paid.
It is the mirror image of a call: profit builds as the stock drops, and the downside for the buyer is limited.
Buyers and sellers
Every option has two sides. The buyer pays premium and holds the right. The seller collects premium up front and takes on the obligation to trade if the buyer exercises.
Sellers profit when the option expires worthless — they simply keep the premium. The wheel strategy is built on being the seller: you collect premium selling puts and calls.
In, at, and out of the money
Moneyness describes where the stock sits relative to the strike. A call is in the money (ITM) when the stock is above the strike; a put is ITM when the stock is below it. At the money (ATM) means the stock is near the strike, and out of the money (OTM) is the opposite of ITM.
Sellers usually write OTM options, because they are more likely to expire worthless and let the seller keep the full premium.
Where the wheel comes in
The wheel strategy is a repeatable way to be the option seller: sell cash-secured puts, take assignment if the put finishes in the money, then sell covered calls against the shares until they are called away.
If you are new to that flow, read the Wheel strategy basics lesson next — it picks up exactly where this one ends.