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Chapter 2. Option Basics > The Workings of Option Contracts

The Workings of Option Contracts

In this section, we review 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 be transferred. The premium is the cost (to the buyer) or value (to the seller) of the option contract. This cost/value is expressed as the value per 100 shares, usually without dollar signs. For example, if an option's current premium is 6, it is worth $600, and if current premium is 4.75, it is worth $475.


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