Finance & Options
Options for Dummies: Calls, Puts and Payoffs
Options work like insurance on a stock: what calls and puts pay at expiry, how to draw and combine their payoffs, and what in, at and out of the money mean.
What to remember
- A call pays max(S_T − K, 0) and a put pays max(K − S_T, 0); the holder has the right to exercise and no obligation to.
- Profit is payoff minus premium: a long call breaks even at K + premium and a long put at K − premium.
- Calls are in the money when S > K and puts when S < K; at the money means S = K.
- Price = intrinsic value + time value, and time value is largest at the money and decays to zero at expiry.
- Long call + short put at the same strike = forward (S_T − K); call + put = straddle, |S_T − K|.
Read the lessonOptions: Calls, Puts and Payoffs, with a checkpoint at the end.