Foundations
1. Calls, puts, buyers and sellers
| Option | Buyer: right | Seller: if assigned |
|---|---|---|
| Call | Buy at the strike | Sell at the strike |
| Put | Sell at the strike | Buy at the strike |
For share-settled options: the buyer pays for the right; the seller receives the premium and must perform if assigned.
2. Strike price and expiration
One example throughout: buy a call for 3, with strike 100 and 30 days to expiration.
Strike price
100
The agreed buy price
Expiration
In 30 days
The right ends
The strike is the agreed trade price; expiration is when the right ends.
4. Read an expiration payoff
If the underlying finishes at 110, the 100 call is worth 110 − 100 = 10.
Expiration value
10
Premium paid
3
Profit
7
| Underlying at expiry | Option value | Buyer profit / loss |
|---|---|---|
| 95 | 0 | −3 |
| 102 | 2 | −1 |
| 103 | 3 | 0 |
| 110 | 10 | +7 |
Breakeven: 100 + 3 = 103. A rise to 102 still loses 1.
All amounts are per underlying unit before costs. Multiply by contract size and quantity.
5. Risk, assignment and settlement
Buyer: maximum loss
3
The premium paid
Uncovered seller: maximum loss
∞
No upper limit
In the same example, the buyer earns 7 at expiration price 110, while the seller loses 7.
Assignment means the seller must fulfill the contract: trade shares at the strike for share-settled options, or pay the settlement amount for cash-settled options.