Calls and puts
A call is the right to buy the underlying at the strike and gains when the price rises; a put is the right to sell it at the strike and gains when the price falls; each can be bought (long) or sold (short), which gives the four basic positions every strategy is built from.
The two kinds of option
A call pays its holder the amount by which the underlying settles above the strike. A put pays the amount by which it settles below the strike. At expiry, for a strike K and a settlement price S:
- call payout = max(S − K, 0)
- put payout = max(K − S, 0)
An easy way to remember them: a call is like a down payment that locks in a purchase price (you gain if the price rises, and if it doesn't you lose only the down payment), and a put is like insurance against a fall (you are paid if the price drops below the strike, and if it doesn't you lose only the premium). See what is an option? for where the analogies stop working.
Long and short
Each option can be bought (a long position: you pay the premium and own the right) or sold (a short position: you receive the premium and owe the payout). That makes four basic positions, and every strategy on this site, from a bull call spread to an iron condor, is a combination of them.
When a strategy pays more premium than it receives, it opens for a net debit; when it receives more than it pays, it opens for a net credit. A credit isn't free money: it is the price someone paid you to take on a risk.
The four positions side by side
Take BTC options with a $100,000 strike, about a week to expiry, a call premium of $2,900 and a put premium of $2,700. Profit or loss at expiry, per contract:
| Position | BTC at $90,000 | BTC at $100,000 | BTC at $110,000 | Max loss | Breakeven |
|---|---|---|---|---|---|
| Long call | −$2,900 | −$2,900 | +$7,100 | $2,900 | $102,900 |
| Short call | +$2,900 | +$2,900 | −$7,100 | Uncapped | $102,900 |
| Long put | +$7,300 | −$2,700 | −$2,700 | $2,700 | $97,300 |
| Short put | −$7,300 | +$2,700 | +$2,700 | $97,300 | $97,300 |
Read it row by row:
- A long call loses at most its premium and gains without limit as the price rises. Breakeven is strike + premium.
- A short call is the mirror image: it keeps the premium if the price stays below the strike, and its loss on a rally has no cap. This is why selling calls without a hedge is one of the riskiest positions there is.
- A long put loses at most its premium and gains as the price falls, up to the strike minus the premium if the underlying went to zero. Breakeven is strike − premium.
- A short put keeps the premium if the price stays above the strike, and loses as it falls below. The loss is bounded only by the underlying reaching zero, which for sizing purposes is treated as uncapped.
The long and the short of the same option always add up to zero: every dollar one side makes, the other side loses, before fees.
Why the call costs more here
In the example the call costs $200 more than the put at the same strike. That isn't a coincidence: when the forward price of BTC for that expiry sits $200 above the strike, the gap between the call and the put has to be about $200, or a riskless trade would exist. That relationship is put-call parity.
Live on BOSS
The four basic positions, built from today's at-the-money options on the selected venue. Compare the shapes: long and short of the same option are mirror images across the zero line.
Common mistakes
- Confusing "selling a put" with "buying a put": a short put profits when the price stays up, a long put when it falls.
- Reading a net credit as profit. It is the most a credit trade can make, and it comes with an obligation.
- Forgetting that a short call's loss on a rally has no cap. A short put's loss is large but stops at the underlying reaching zero.
- Computing breakeven from the strike alone: it is strike + premium for a call and strike − premium for a put.
Where this shows up on BOSS
Educational content, not investment advice. See the disclaimer.