Calls and puts: rights and obligations
A call is the right to buy at the strike; a put is the right to sell. Buyers pay premium for rights; sellers take on obligations.
Options risk. Long options can lose 100% of the premium; short options can lose far more and may be assigned early. Examples use synthetic prices and the common 100-share multiplier — check actual contract terms.
Before you start
Options can lose 100% of the premium paid quickly, short options can lose far more than the premium received, and assignment can create stock positions you did not plan for. These lessons use synthetic numbers and the common 100-share multiplier; check the actual contract terms and your broker's rules.
The four basic positions
Long call: pay premium for the right to buy 100 shares at the strike before or at expiration. Long put: pay premium for the right to sell at the strike. Short call / short put: receive premium and accept the obligation to sell / buy if assigned.
Premium is quoted per share. A quote of 2.00 on a standard contract costs 2.00 × 100 = $200 plus fees.
Moneyness: a call is in the money (ITM) when the stock is above the strike, out of the money (OTM) below it; a put is the reverse. At the money (ATM) means near the strike.
Worked example
A long call at expiration (synthetic)
- Buy one 50-strike call for 2.00: cost $200.
- Stock at $56 at expiration: value = (56 − 50) × 100 = $600. Profit = $600 − $200 = $400.
- Stock at $51: value $100; loss = $100.
- Stock at $49: expires worthless; loss = the full $200 premium.
A long option's maximum loss is the premium, but losing all of it is a common outcome.
Common misconceptions
“Buying calls is a cheap way to own stock.”
You own a decaying right, not shares. If the stock doesn't move enough before expiry, the premium is lost.
“Selling options is 'free income'.”
The premium is payment for taking risk. Short calls have theoretically unlimited loss; short puts can lose almost the whole strike value.
Checkpoint