Summary

An option is a standardized contract conveying the right (calls: buy; puts: sell) to transact in an underlying at a strike price, with the seller bearing the corresponding obligation¹. The mechanics that matter most for a premium-selling business are exercise style, settlement mode, and how index products differ from ETF products — these determine assignment risk, cash needs, and position sizing.

Contract Anatomy

Element	Meaning
Underlying / class	The security all its options share (e.g., IBM)
Series	Calls or puts of one class, month, and strike
Contract size	Typically 100 shares; adjusted by splits/special dividends
Strike	Fixed transaction price; listed in $1–$10 increments
Expiration	Traditionally the Saturday after the third Friday; Weeklys and LEAPS extend the menu
Type	Call (right to buy) vs put (right to sell)
Premium	Intrinsic value (amount ITM) + time value

Buyers hold rights only — no voting, no dividends. The OCC stands between every buyer and seller, guaranteeing exercise/assignment performance even if the original counterparty vanishes¹.

Exercise and Assignment

• Exercise is the holder's choice; assignment is the writer's matching obligation, allocated by the OCC through clearing firms¹.
• American style: exercisable any day through expiration — listed equity options are American, so short equity options carry early-assignment risk (highest for deep-ITM puts and near ex-dividend dates for calls)¹².
• European style: exercisable only at expiration — most broad index options (SPX) are European.
• Early exercise of an American call on a non-dividend stock is never optimal; deep-ITM American puts can be (interest on the strike)².

Physical vs Cash Settlement

Feature	Physically settled (SPY, equities)	Cash settled (SPX)
Exercise result	Shares change hands	Cash = intrinsic value
Assignment capital need	Full stock position	Cash credit/debit only
Early assignment risk	Yes (American)	No (European)
Overnight gap risk after assignment	Yes	No

Cash settlement removes the operational risk of waking up short 1,000 shares over a weekend — a core reason index underwriting suits a one-person shop.

SPX vs SPY

The books treat SPY as roughly 1/10th the size of SPX: SPY delta 30 ≈ SPX delta 3, and $3,000 of premium sold in either carries the same theta and vega — product choice is about exercise style and settlement mode, not greek exposure³. (Mini-sized and tax-advantaged index variants exist beyond the book evidence; their specifications are covered, if needed, in Modern market structure with their own sources.)

Expiration Timing

• Listed monthly options traditionally expire the Saturday following the third Friday; the last trading day is that Friday¹. Weeklies expire on their Friday (or the exchange-designated day). Exercise style and settlement differ by series, not by underlying label: book-era broad-index contracts were European-style with designated settlement conventions, and current index series differ (classic monthlies vs weeklies) — confirm per-series on the exchange's product page before trading; series-specific settlement detail is out of scope of the book evidence.
• Pin risk at expiration — not knowing whether a short option will be assigned when the underlying sits at the strike — is a real cost for short-premium traders and a reason professionals flatten at-risk conversions and short straddles before the close.

Links

• Payoffs, Parity, and Synthetics
• The TOMIC Insurance Model
• Source depth: Trading Option Greeks Ch 1, Hull options basics

Footnotes

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1. Trading Option Greeks, Ch 1 — rights/obligations, OCC, contract specifications, exercise styles. ↩↩↩↩↩

2. Hull, options-basics topic — early-exercise analysis and contract fundamentals. ↩↩

3. The Option Trader's Hedge Fund, greeks topic — SPX/SPY conversion ratios and equivalent premium. ↩