The two building blocks
Every option strategy is built from calls and puts. Understanding what each one does - and the difference between buying and selling - is the foundation for collars, buffers, and covered calls.
Call
- Buyer
- Right to buy the underlying at the strike price through expiration.
- Seller
- Obligation to sell the underlying at the strike price if assigned.
- Common Parity use
- Establish an upside cap or generate income.
Put
- Buyer
- Right to sell the underlying at the strike price through expiration.
- Seller
- Obligation to buy the underlying at the strike price if assigned.
- Common Parity use
- Establish downside protection or create a buffer.
Buying vs selling
Buying a call
You pay a premium for the right to buy at the strike. Your profit grows as the underlying rises above the strike plus the premium. Your loss is limited to the premium paid.
Selling a call
You receive a premium and take on the obligation to sell at the strike if assigned. Your profit is the premium if the call expires worthless. Your risk grows as the underlying rises.
Buying a put
You pay a premium for the right to sell at the strike. Your profit grows as the underlying falls below the strike minus the premium. Your loss is limited to the premium paid.
Selling a put
You receive a premium and take on the obligation to buy at the strike if assigned. Your profit is the premium if the put expires worthless. Your risk grows as the underlying falls.
Try it: move the price
Use the interactive diagram below to see how each contract behaves. Move the underlying price and compare the value at expiration against the current market value before expiration.
Value at expiration
+$5.00 / share
What the contract is worth if held to the expiration date at this price.
Current value (before expiration)
+$8.00 / share
Before expiration the option may still have time value, so its market price can differ from the expiration payoff.
Illustrative only. Uses a $100 strike and $5 premium. Actual option values depend on market conditions, time to expiration, volatility, and other factors. Not investment advice.
Profit at expiration vs. current value
The payoff at expiration is a hard line: the option is worth exactly its intrinsic value on the expiration date. Before expiration, the option still has time value, so its market price can be higher (or lower) than the expiration payoff would suggest. This is why the two numbers above can differ.