Chapter 8 · Options Basics
Calls, puts and premium
A right without an obligation — and the asymmetry that creates between buyer and seller.
14 of 66 · 10 min
An option gives the buyer a right and the seller an obligation. That asymmetry is the whole instrument, and it is why the buyer pays the seller a premium.
| Call | Put | |
|---|---|---|
| Buyer has the right to | Buy at the strike | Sell at the strike |
| Buyer profits when | Price rises above strike + premium | Price falls below strike − premium |
| Buyer's maximum loss | The premium | The premium |
| Seller's maximum gain | The premium | The premium |
| Seller's maximum loss | Unlimited | Large but bounded |
What a call option pays at expiry
What a put option pays at expiry
Worked example
A call with strike Rs 500 costs Rs 20.
- Break-even = 500 + 20 = Rs 520
- At Rs 540: profit = 540 − 520 = Rs 20 per share
- At Rs 500 or below: loss = Rs 20, the whole premium, and no more
- The seller's picture is exactly this, inverted.
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