Calls and Puts
Call Options
A call option gives the buyer the right to buy the underlying asset at the strike price before expiration.
Example: Buying a Call
Stock XYZ is trading at $100. You buy a call option with:
- Strike price: $105
- Expiration: 30 days
- Premium: $3.00 per share ($300 total)
If XYZ rises to $115 before expiration, your option is worth at least $10 (intrinsic value). After subtracting your $3 cost, your profit is $7 per share, or $700 per contract.
Put Options
A put option gives the buyer the right to sell the underlying asset at the strike price before expiration.
Example: Buying a Put
Stock XYZ is trading at $100. You buy a put option with:
- Strike price: $95
- Expiration: 30 days
- Premium: $2.50 per share ($250 total)
If XYZ falls to $85 before expiration, your option is worth at least $10 (intrinsic value). After subtracting your $2.50 cost, your profit is $7.50 per share, or $750 per contract.
Quick Reference
| Position | Market View | Max Profit | Max Loss |
|---|---|---|---|
| Long Call | Bullish | Unlimited | Premium paid |
| Long Put | Bearish | Strike - Premium | Premium paid |
| Short Call | Neutral/Bearish | Premium received | Unlimited |
| Short Put | Neutral/Bullish | Premium received | Strike - Premium |
In-the-Money vs. Out-of-the-Money
- In-the-Money (ITM)
- Call: Stock price > Strike price
Put: Stock price < Strike price - At-the-Money (ATM)
- Stock price ≈ Strike price
- Out-of-the-Money (OTM)
- Call: Stock price < Strike price
Put: Stock price > Strike price