Rights and obligations
A call gives its holder the right to buy an underlying asset at a strike price under the contract terms. A put gives the right to sell. The premium is the price of that right. Exercise style, expiry and settlement vary by contract. Certain uncovered option positions can expose sellers to unlimited losses.
A hypothetical call at expiry
Assume a call has a $50 strike, a $2 premium per share and a 100-share multiplier. The initial premium is $200. At a $55 underlying price at expiry, intrinsic value is $500 and the profit is $300 before costs. At $50 or below, the call has no intrinsic value and the premium can be lost.
Payoff is not an earlier market price
The example is an expiry calculation. Before expiry, an option can have time value. Do not apply the expiry formula as an exact quote for a live option, or assume that all options have a 100-share multiplier.
Sources & method
Sources support the referenced concepts. Numerical examples are hypothetical unless stated otherwise. A link does not imply endorsement.