Stock options, in plain English

An option is a contract. The contract gives you the right, not the obligation, to buy or sell 100 shares of a stock at a specific price on or before a specific date. You pay a small fee for that right up front. If you never use it, the most you lose is that fee.

A useful analogy: think of an option like a coupon that lets you reserve a store item at today's price, even if the price goes up before you pick it up. The coupon has a small cost (the fee), it expires on a date the store picks, and you can throw it away if you change your mind. That reservation is the "right." The "not the obligation" part is what makes it an option, not a purchase.

Every option contract covers 100 shares of the underlying stock — that is the standard bundle on US exchanges. Anything you read about a single option contract refers to 100 shares of stock.

There are two flavours of option, and they sit on opposite sides of the same idea. A call is the right to buy shares at the agreed price. A put is the right to sell shares at the agreed price.

Imagine a company called Acme currently trades at $50:

• A call at a $55 strike gives you the right to buy Acme at $55 even if it later trades at $70. You make money when the stock goes up.
• A put at a $45 strike gives you the right to sell Acme at $45 even if it later trades at $30. You make money when the stock goes down.

This is exactly the vocabulary the Wheel uses: the covered call is the call leg, and the cash-secured put is the put leg. Both halves appear again on the Wheel strategy overview →

The strike price is the agreed price at which the contract lets you buy or sell the stock. To extend the coupon analogy: it's the price printed on the reservation. The strike is fixed when the contract is written, and it does not change.

Call it strike = $50 , and you have the right to buy or sell at exactly $50. Whether that's a good deal depends on where the stock is actually trading — which is where two more terms come in:

• In-the-money. The strike is on the favourable side of the market — for a call, that's below today's price; for a put, that's above today's price. The contract already has real value if used today.
• Out-of-the-money. The strike is on the unfavourable side — for a call, that's above today's price; for a put, that's below today's price. The contract has no value if used today, only the chance that it becomes more valuable later.

The Wheel picks strikes that sit just out-of-the-money — far enough from the current price that the trade feels safe, close enough that the fee you collect is still meaningful.

Every option has an expiration date — the deadline after which the contract stops existing. On that date the right either gets used (if it has value) or expires worthless (if it doesn't). There is no grace period.

Options expire on a fixed schedule. Most large US stocks and ETFs offer weekly expirations (every Friday) and monthly expirations (the third Friday of each month). A trader chooses which expiration to buy or sell — the further out the date, the more fee the contract generally costs, because there's more time for the trade to work out.

Common shorthand: DTE = days to expiration. "35 DTE" means the contract has 35 calendar days left before it stops existing.

The premium is the price of the contract — the fee you pay to buy the right, or the fee someone pays you when you sell the right. Premium is per share, and because each contract covers 100 shares, the contract price is the per-share premium times 100.

Two important details: premium is paid up front, the moment the trade opens, and sellers receive the premium. That second half is the one the Wheel leans on: when you sell an option, the premium lands in your account on day one. You keep it whether or not the contract ends up being used.

Premium is the income. The Wheel is, at its core, a way to collect premium on a regular cadence by selling options on names you'd happily own. That premium is what the rest of this site talks about.

The Wheel is just a sequence of options trades stitched together so the premiums stack. Once you know the five words above, the trade names read like English.

The first leg is a cash-secured put: you sell a put (the put from §2), set aside enough cash to actually buy 100 shares at the strike if it gets used, and collect the premium up front (the premium from §5). The cash has to be there because if the stock falls and the put goes in-the-money, you'll be assigned — your broker will use that cash to buy you the shares at the strike.

The second leg is a covered call: now that you own 100 shares (whether through assignment or by buying them outright), you sell a call against them (the call from §2) and collect another premium up front. If the call finishes in-the-money, your shares sell at the strike — and your combined premiums from both legs are realised income.

That's the cycle: sell a put, get assigned or keep the premium, sell a call, repeat. No math beyond the five definitions in §1 through §5.

Ready for the full version of this — start with the Wheel overview → see the full curriculum →