Contract Elements — Options Tutorial

Start with a Real Contract

Let’s decode what “AAPL 250417C00200000” actually means — an Apple call option expiring April 17, 2025, with a $200 strike price. Every options contract packs the same core information:

Underlying: the stock or ETF the option is based on
Direction: Call (right to buy) or Put (right to sell)
Expiration date: when the contract ceases to exist
Strike price: the locked-in buy/sell price
Contract size: how many shares one contract controls (typically 100 for US equity options)

With these elements in place, the only remaining question is: how much does this contract cost? That’s the premium — and understanding what drives it is the core of this tutorial.

Strike Price

The strike price determines the price at which you’ll buy or sell the underlying if you exercise. For any given stock and expiration date, the exchange lists multiple strike prices — you pick the one that matches your outlook and budget.

Strikes closer to the current stock price cost more. Strikes far away are cheaper but less likely to pay off. This trade-off gives rise to a critical concept.

ITM, ATM, OTM

The test is simple: if you exercised right now, would you make money?

Take a stock trading at $100:

Option Type	Strike	Exercise Now	Status
Call	$90	Buy at $90, stock worth $100 — profit $10	In the Money (ITM)
Call	$100	Buy at $100, stock worth $100 — breakeven	At the Money (ATM)
Call	$110	Buy at $110, stock worth $100 — lose $10	Out of the Money (OTM)

For puts, reverse the logic: a put with a strike above the stock price is ITM; below is OTM.

The rule of thumb: exercise now and profit = ITM, breakeven = ATM, loss = OTM. No formulas to memorize — just ask yourself whether exercising right now would make sense.

Intrinsic Value

Intrinsic value = the profit you’d get from exercising immediately.

A $90 strike call on a $100 stock has $10 of intrinsic value. OTM and ATM options have zero intrinsic value — nobody exercises a right that loses money.

A real example: on March 27, 2015, the 50ETF closed at 2.649 yuan. A May call with a 2.500 strike was priced at 0.2160. Exercising immediately would yield 2.649 - 2.500 = 0.1490 — that’s the intrinsic value. But the option traded at 0.2160, which is 0.0670 more than intrinsic value.

What’s that extra 0.0670?

Time Value

That extra 0.0670 is time value.

The logic is intuitive: the option hasn’t expired yet, so the underlying price could still move favorably. The market prices in this possibility. More time remaining means more possibility, which means higher time value.

Here’s the critical nuance — time value doesn’t decay linearly. It melts like ice in the sun: slowly at first, then accelerating as expiration approaches. The final week is brutal. This is one of the most common traps for beginners: you buy a near-expiration option, the stock moves in your direction, but time decay eats your profit anyway.

The formula:

Option Price = Intrinsic Value + Time Value

At expiration, time value drops to zero. The option is worth exactly its intrinsic value — and OTM options become worthless.

What Drives Option Prices

Think of options as insurance, and the factors become intuitive.

Underlying Price

Insuring a Porsche costs more than insuring a Volkswagen Polo. Higher asset value, higher premium.

For options: when the underlying rises, calls get more expensive and puts get cheaper. When it falls, the reverse. On August 27, 2015, the 50ETF jumped 8.43% — OTM calls surged as much as 64.42%, while OTM puts plunged up to 61.48%.

Time to Expiration

A one-year insurance policy costs more than a three-month one. Same with options — longer-dated contracts carry higher premiums because the underlying has more time to move.

Between March 18 and 25, 2015, the 50ETF barely budged (2.611 → 2.604) and volatility held steady, yet a call option lost 12.5% of its value. Pure time decay at work.

Volatility

Earthquake insurance in California costs more than in Kansas — higher risk, higher premium.

Volatility measures how aggressively the underlying price swings. Higher volatility makes all options more expensive, both calls and puts.

Here’s the counterintuitive part. On November 26, 2015, the 50ETF rose 0.46%, but call options broadly declined. Why would calls drop when the underlying went up? Because implied volatility (IV) collapsed from ~25% to ~20% that day. The volatility crush more than offset the benefit of the underlying’s rise.

IV is the most overlooked factor in options pricing — and the one most likely to cost beginners money. We’ll cover it in depth in a later tutorial.

Strike Price

For calls, a higher strike means lower probability of finishing ITM, so a cheaper premium. For puts, a higher strike means higher probability of finishing ITM, so a more expensive premium.

Interest Rates and Dividends

Smaller effects, but the direction is clear: rising risk-free rates make calls more expensive and puts cheaper. Dividends do the opposite. At the beginner stage, don’t overthink these two.

Quick Reference

Concept	One-liner
Strike Price	The locked-in price at which you buy/sell the underlying
ITM / ATM / OTM	Exercise now for profit / breakeven / loss
Intrinsic Value	Profit from immediate exercise; zero for OTM options
Time Value	The price of “not yet expired”; drops to zero at expiration
Implied Volatility (IV)	How wildly the market expects the underlying to move; higher IV = pricier options

Exercise

Open the options chain for a stock you follow. Pick one ATM call and one OTM call with the same expiration.

Ask yourself three questions:

What is the intrinsic value of each?
What percentage of total price is time value for each?
If the stock doesn’t move for a week, which option loses more value (in percentage terms)? Why?