The Math & components
Every option contract involves three critical components that define your risk, reward, and timing.
1. Strike Price
The strike price is your "target". It is the fixed price at which you have the right to buy or sell the stock.
You want the stock to go ABOVE the strike.
You want the stock to go BELOW the strike.
Hypothetical Scenario
2. Expiration
Options don't last forever. They have a strict deadline. At 4:00 PM EST on the expiration date, the game is over.
The stock reached your target! The option has Intrinsic Value. You can exercise it or sell it for profit.
The stock missed the target. The option expires Worthless. The buyer loses their premium, the seller keeps everything.
3. Premium
The Multiplier Rule (x100)
This confuses everyone at first. One option contract = 100 shares.
Always multiply the listed price by 100.
Essential Math: Finding Breakeven
Call Breakeven
Since you paid money upfront, the stock needs to go up enough to cover that cost.
Put Breakeven
You need the stock to drop enough to cover the premium you paid.
Real World: Reading an Option Chain
Example of a Robinhood Option Chain. Notice the Strike Prices in the center and the "Ask" price on the right.
Trade Simulator
We want the stock to go UP.
We profit if the stock is above $105.00 (Strike + Premium).