How Option Contracts Work

Michael C. Thomsett

Let us examine the rules of the option contract. The mechanics of expiration, strike price, and time and intrinsic value affect all decisions related to how you should or should not employ options and how risks increase or decrease as you employ a particular strategy.

Option Attributes to Determine Value

Collectively, the attributes of the option contract determine its value. This value relates not only to how high or low the premium is, but also to how the option has value as a strategic tool in your stock portfolio. Option contracts refer to 100 shares, so each contract allows the buyer to control 100 shares of the underlying stock. Every option relates specifically to that one stock and cannot ...