The four positions, and nothing else
There are exactly two kinds of listed equity option and two sides to each, which gives four positions in total. A call is the right to buy 100 shares at a fixed price; a put is the right to sell 100 shares at a fixed price. You can hold either right, or you can be the party who granted it. Holding a right is called being long; granting one is called being short, or writing. Every strategy with a name, whether spreads, straddles, collars or condors, is a combination of these four, and knowing that is genuinely most of the work.
The fixed price is the strike. The date the contract ceases to exist is expiry. The amount the buyer pays the seller for the right, once, at the start, is the premium. Those three numbers, plus which of the four positions you hold, fully determine the outcome at expiry for any share price. That is an unusually clean property, and it is why options can be taught with arithmetic rather than intuition.
Why the multiplier matters more than the premium
Premiums are quoted per share, and one contract covers 100 shares. A contract quoted at 3.00 therefore costs 300 dollars, and a call struck at 50 controls 5,000 dollars of stock for that 300. This is the leverage, and it is also where most beginner arithmetic goes wrong: the quoted numbers look small, so the exposure gets underestimated by exactly two decimal places. Whenever a figure on this site is described as per share, multiply by 100 to get the contract.
Worth stating plainlyThe buyer's maximum loss is the premium, in full, and losing all of it is the ordinary outcome rather than the disaster case. An option that expires with the share price on the wrong side of the strike is not a failure of the machinery; it is the machinery doing exactly what the contract says.
What the premium buys, and what it decays into
A premium has two components. Intrinsic value is the amount by which exercising right now would already pay: for a call, the share price minus the strike, floored at zero. Everything above that is extrinsic value, and it is compensation for the time remaining and the uncertainty within it. Extrinsic value is the part that decays. It falls as expiry approaches and it falls faster near the end, because there is progressively less time in which anything can happen.
This decomposition explains the two facts that surprise people most. First, a share can move in your favor while your option loses money, if the extrinsic value it shed exceeds the intrinsic value it gained. Second, an option can be worth something when exercising it would produce nothing at all: that is pure extrinsic value, priced entirely on what might still happen.
Where the position starts making money
Break-even is not the strike, and this is the most consequential arithmetic on the page. A call buyer has already paid the premium, so the position sits at minus the premium for every price below the strike. Above the strike, intrinsic value climbs one-for-one with the share price and spends the first stretch of that climb repaying what was paid. Break-even is therefore the strike plus the premium for a call, and the strike minus the premium for a put.
Read the same diagram reflected through the horizontal axis and you have the writer's position: a maximum gain equal to the premium, reached whenever the option expires worthless, and a loss that grows past the same break-even point. The two sides of one contract are mirror images by construction. Nothing is created by the trade; the premium simply moves from one party to the other, and the obligation moves the other way.
Exercise, assignment and expiry
Exercise is the holder using the right. Assignment is the writer being held to the obligation as a consequence. Most listed US equity options are American-style, meaning exercise can happen on any business day up to expiry rather than only at the end, so a writer cannot assume the position is safe until the final bell. In practice early exercise clusters around dividend dates and deep in-the-money contracts, but the possibility is always there, and a position should be understood with it rather than despite it.
At expiry the contract resolves and disappears. In the money, it is generally exercised automatically by the clearing house above a small threshold, which means shares change hands and cash moves whether or not anyone pressed a button. Out of the money, it simply lapses. For a buyer that is the end of it. For a writer, the obligation was real right up to the close, which is the entire reason the final day gets its own page.