The anatomy of an options contract

What is an option?

An option is an agreement that gives you the right (but not the obligation) to buy or sell something at a price agreed in advance.

PutPutAn option type that grants the right to SELL at a set price. Used as insurance.Read the lesson → simply: it's like an insurance policy.

Call vs Put — the two option types

There are only two types. It's that simple:

A Call option — the right to buy at a fixed price. You use it when you expect the price to rise. It's like a deposit on an apartment — you lock in the price now, and buy later.

A Put option — the right to sell at a fixed price. You use it when you want to protect yourself against a price drop. It's like insuring your property against fire.

Key terms

Every option has four things:

The four basic positions

Every option has two people involved: a buyer and a seller. With two types (CallCallAn option type that grants the right to BUY at the strike price. The opposite of a put.Read the lesson → and PutPutAn option type that grants the right to SELL at a set price. Used as insurance.Read the lesson →), that gives us four possibilities:

Buyer vs seller

This is the single most important distinction:

The option buyer (Long):

• Pays the premium (the insurance fee)
• Gets the right, but not the obligation
• Maximum loss = the premium paid
• Time works against them (the insurance "ages")

The option seller (Short):

• Receives the premium (earns it right away)
• Takes on the obligation — must perform if the buyer wants to
• Can lose a lot more
• Time works in their favor (the insurance "ages" — that's good for them)

A practical example: a SOL option

Say SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → is trading at $88 right now.

A note on the numbers: each example is calculated for a specific option quantity — 200 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → in the first, 50 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → in the second. That is NOT the amount of SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → in your portfolio — it's the size of the option contract itself. The total is always = the per-SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → amount × the quantity.

Example 1 — Long Put (insurance):

• You buy a PutPutAn option type that grants the right to SELL at a set price. Used as insurance.Read the lesson →, strike $90, expiring in 120 days
• You pay the premium: $6.50 per SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → (200 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → = $1,300)
• BreakevenBreakevenThe breakeven point — the price at which a position is neither profitable nor at a loss.Read the lesson →: $90 − $6.50 = $83.50
• If SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → drops to $60: the PutPutAn option type that grants the right to SELL at a set price. Used as insurance.Read the lesson → is worth $30 per SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson →, minus the premium — $23.50 per SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → (200 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson →: $6,000 − $1,300 = $4,700)
• If SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → rises to $120: the PutPutAn option type that grants the right to SELL at a set price. Used as insurance.Read the lesson → goes unused. You lose the $1,300 premium

Example 2 — Short Call (income):

• You sell a CallCallAn option type that grants the right to BUY at the strike price. The opposite of a put.Read the lesson →, strike $160, expiring in 120 days
• You receive the premium: $2.00 per SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → (50 SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → = $100)
• BreakevenBreakevenThe breakeven point — the price at which a position is neither profitable nor at a loss.Read the lesson →: $160 + $2.00 = $162
• If SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → stays below $160: the CallCallAn option type that grants the right to BUY at the strike price. The opposite of a put.Read the lesson → goes unused. You keep the $100
• If SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → rises above $160: settlement is in cash — you pay the difference above $160. Example, at $180: ($180 − $160) × 50 = $1,000, minus the $100 premium received → −$900 from this options position. If you're also holding SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson →, its gains offset that loss — more on this in lesson 5-7

The lifecycle of an option

Every option goes through three stages:

1. Opening — the buyer and seller enter into the contract
2. Life — the option's value changes along with price and time
3. Ending — one of three outcomes:
   • Expires worthless — the price never reached the strike. The option disappears
   • Exercised — the buyer uses their right
   • Closed early — you sell the option on the market before it expires

Why do options matter for our strategy?

In our strategy, options do two jobs:

1. Protection — a PutPutAn option type that grants the right to SELL at a set price. Used as insurance.Read the lesson → option protects against a large price drop (like insurance)
2. Income — a CallCallAn option type that grants the right to BUY at the strike price. The opposite of a put.Read the lesson → option generates extra money (like rent)

This lets you hold SOLSOLSolana's native token. Used to pay gas and as collateral.Read the lesson → while managing risk deliberately — you decide for yourself how much of a drop the insurance covers.

Next up: now we'll look at how options differ by price zone — ITMITMIn The Money — an option that has intrinsic value.Read the lesson →, ATMATMAt The Money — an option whose strike sits at the current price.Read the lesson → and OTMOTMOut of The Money — an option with no intrinsic value, only time value.Read the lesson →.