Introduction
An options contract is a legally binding agreement that gives the buyer the right — but not the obligation — to buy or sell an underlying asset at a specific price (the strike price) on or before a specific date (the expiration date). The buyer pays a premium for this right. The seller receives the premium and takes on the corresponding obligation.
The Four Components of Every Options Contract
Every options contract has exactly four defining elements:
1. Underlying asset The stock, ETF, or index the option is tied to. Common examples: SPY (S&P 500 ETF), QQQ (Nasdaq ETF), AAPL (Apple stock).
2. Strike price The price at which the buyer can exercise the right to buy or sell. A call option with a strike of $500 gives the buyer the right to buy at $500, regardless of the current market price.
3. Expiration date The date after which the option no longer exists. Options can expire daily, weekly, or monthly depending on the underlying. After expiration, out-of-the-money options expire worthless.
4. Premium The price paid by the buyer to the seller. For one contract (100 shares), a premium of $1.50 means the buyer pays $150 total. The seller receives this $150 as income.
Calls vs. Puts
Call option: Right to buy the underlying at the strike price. Buyers of calls profit when price rises above the strike; sellers of calls profit when price stays below the strike.
Put option: Right to sell the underlying at the strike price. Buyers of puts profit when price falls below the strike; sellers of puts profit when price stays above the strike.
Buyer vs. Seller: Mirror Image Risk
The buyer and seller of any options contract have inverse risk profiles:
| Buyer | Seller | |
|---|---|---|
| Premium | Pays | Receives |
| Right/Obligation | Has the right | Has the obligation |
| Maximum loss | Premium paid | Spread width (for defined-risk trades) |
| Probability of profit | Lower (directional) | Higher (premium keeps if option expires OTM) |
Income strategies like iron condors are built on the seller side — collecting premium from buyers and profiting when the options expire out-of-the-money.
Why One Contract = 100 Shares
The 100-share multiplier is a standard specification in US equity options markets. Every options contract quoted at $1.50 represents a total premium of $150 (not $1.50) per contract. This multiplier applies to all calculations:
- Credit received: $1.50 quoted × 100 = $150 per contract
- Maximum loss: $3.50 calculated × 100 = $350 per contract
For a deeper look at how this translates to iron condor mechanics, see What Is an Iron Condor Options Strategy? The Complete Guide. For education resources on options basics, the Options Industry Council provides structured beginner content.
How Options Contracts Are Used in Income Strategies
Tradematic is an automated trading platform that executes iron condors — a defined-risk options income strategy that involves selling four options contracts simultaneously (two puts and two calls) and collecting the net premium. The platform manages the entry, monitoring, and exit of these positions automatically in connected broker accounts.
Understanding what an options contract is — and how the buyer/seller relationship works — is the foundation for understanding why selling premium with defined risk generates consistent income over time.
Conclusion
An options contract gives the buyer the right to buy or sell an asset at a defined strike price before the expiration date. The buyer pays a premium; the seller collects it. One contract covers 100 shares, so all premium figures are multiplied by 100. Income strategies work by selling options and keeping the premium as they decay.
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Trading involves risk and losses can occur. Past performance does not guarantee future results. Options trading is not suitable for all investors. Only allocate capital you are comfortable risking.
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