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Let’s say SPY is currently trading at $400. You believe the market will go up over the next month, so you buy a call option with a strike price of $405, expiring in one month. You pay a premium of $5 per share (remember, each option contract controls 100 shares, so your total cost is $500). If, by the expiration date, SPY's price rises to $410, your option is *in the money*. You can exercise your option, buying SPY shares at $405 (the strike price) and immediately selling them at the market price of $410, making a profit. Your profit would be ($410 - $405) * 100 = $500, minus the premium you paid ($500). If, however, SPY stays below $405, the option expires worthless, and you lose the premium you paid.
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