*In the previous article, we discussed what makes an option valuable.* *At its core, an option is about choice—the choice to buy or sell an asset at a specific price within a set timefram*e. *In this article, we’ll explore exactly what this means. *

**An option gives the holder the right, but not the obligation, to trade a certain amount of the underlying asset at a specific price on or before a certain date.**

Let’s break down each of the terms.

**An option gives the holder the right, but not the obligation, **to trade…

What makes options useful is that they, err, give you *options*.

- If you buy a
**call**option, it gives you the option to**buy**the underlying asset. - If you buy a
**put**option, it gives you an option to**sell**the underlying asset.

### …a certain amount of…

A single option gives the holder the option to trade a certain amount of the underlying asset.

This is called the *contract unit* or the *contract multiplier*.

- For US stocks, a single option gives you the option to trade 100 shares (assuming they haven’t split).
- For equity index options, the index value is usually 100 times that of the index value.
- For futures options, it is one futures contract.

### ..the underlying asset…

The underlying asset is the product (spot product) to which the option relates. Options are available on stocks, indices, and futures.

### …at a specific price…

The price the holder of the option can trade at is called the *strike price.*

- The holder of a call option can buy at the strike price.
- The holder of a put option can sell at the strike price.

### …on or before a certain date.

This is the *expiration date* of the option, which is the last day the option contract exists.

The holder of the option can *exercise* their right to buy or sell at the strike price on or before the *expiration date.*

- A European option can only be exercised on the
*expiration date*. - An American option can be exercised anytime before or on the
*expiration date*.

## An Example

- $200 calls on TSLA, expiring on 17 July 2024.
- American option. Contract unit: 100.

The owner of these calls has the option to buy 100 TSLA shares at $200 on or before 17 July 2024.

At the time of writing TSLA is trading at $180.

So you could buy TSLA shares cheaper in the market than you could by *exercising* this option. So, the *intrinsic value* of this call option is $0. It’s not intrinsically valuable to us *right now*.

If TSLA were trading at $210, then the option *is *intrinsically valuable. You could exercise the option, buying 100 shares of TSLA stock at $200, then immediately sell them on the stock market for a profit of $10 per share.

If the option has some time left to expiry, then it’s always going to have some value, *because the TSLA share price is volatile.* As long as there is a *chance* that the price will exceed $200 by 17 July 2024, the option will have some value.

*How much value? We’ll get to that next*.

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