# Read a contract and its premium

**OPT-F01 · Core Options · Beginner**

**Lesson question:** What does a 4.20 option quote actually cost?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

Read the contract before predicting the market. Underlying, call or put, strike, expiry, action, quantity, multiplier and premium are separate fields. A 100 strike is not a 100-dollar option price, and a 4.20 quote is not necessarily a 4.20-dollar transaction.

A ticket is a statement of rights and obligations. Misreading one field can create a different trade even when the market view is reasonable.

## Understand the mechanism

A standard 100-unit teaching contract quoted at 4.20 costs 420 for one long contract before fees. Two cost 840. You have bought option rights, not immediately acquired 200 shares. A call concerns buying at the strike; a put concerns selling. Shorting either grants that right to another holder and creates an obligation.

The bid, ask, midpoint and last trade are different observations. A midpoint is not a guaranteed fill and a last price may be stale. Standard equity multipliers are commonly 100, but adjusted contracts can have different deliverables. Read the actual contract.

## Walk through the process

Translate the ticket into a full sentence and write the total opening cash. Then inspect spread width, expiry and possible exercise consequences. Distinguish buy/sell to open from buy/sell to close.

When measuring return, keep cash and percentage units separate. A premium increase from 4.20 to 4.50 is 0.30 per unit, or 30 per standard contract. It is about 7.14% of the premium, not a 30% return and not the underlying's return.

## A worked example

Buy two fictional QLT 100 calls for 4.20, multiplier 100. Premium outlay is 840. At an illustrative entry fee of 0.65 each, cash outlay is 841.30. Later sell both at 4.50 with another 1.30 total fees: proceeds before fees are 900 and net round-trip P/L is 900−840−1.30−1.30=57.40.

The strike does not enter this closing-trade arithmetic because the rights were sold, not exercised. The graph scales premium cash by contract count.

## Graph: Read a contract and its premium—worked comparison

**Horizontal:** Illustrative observation  
**Vertical:** Example value

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/options-strategies/OPT-F01.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

Budgeting 4.20 instead of 420 understates the contract outlay by a factor of 100. Buying many cheap options can still create a large total premium loss. Cheap quoted price is not a risk classification.

## Check your understanding

### Two contracts at 4.20 with a 100 multiplier cost how much before fees?

**Answer:** 840.

**Why:** Quantity×premium×multiplier; do not substitute the strike.

### What is the critical failure to avoid?

**Answer:** Budgeting 4.20 instead of 420 understates the contract outlay by a factor of 100. Buying many cheap options can still create a large total premium loss. Cheap quoted price is not a risk classification.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: What does a 4.20 option quote actually cost? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [OCC Equity Options specifications](https://www.theocc.com/clearance-and-settlement/clearing/equity-options-product-specifications)

- [OCC Options Disclosure Document](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document)