Options & Derivatives·Options Fundamentals
Calls and Puts: The Building Blocks
A right, not an obligation
An option contract gives the holder the right — but not the obligation — to buy (call) or sell (put) the underlying at a specified strike price on or before the expiry date. The buyer pays a premium for that right; the seller (writer) collects the premium and takes on the obligation to deliver at the strike if assigned.
Long call
Buy the right to buy
Pay premium up front. Profit if the underlying rises above strike + premium. Loss capped at premium paid.
Max loss = premium
Long put
Buy the right to sell
Pay premium. Profit if underlying falls below strike − premium. Loss capped at premium paid.
Max loss = premium
Short call
Sell someone the right to buy
Collect premium. Obligation to deliver at strike. Loss is theoretically unlimited above strike + premium.
Max loss = ∞
Short put
Sell someone the right to sell
Collect premium. Obligation to buy at strike. Loss capped only by underlying going to zero.
Max loss = strike − premium
Put-call parity (European, no dividends)
C − P = S − K · e^(−rT)