Calls and puts

An option is a contract giving the buyer the right, but not the obligation, to trade the underlying at a fixed price (the strike) before or at a fixed date (expiry). That asymmetry — a right, not an obligation — is what makes options different from futures.

The two basic types

• A call gives the right to buy the underlying at the strike. You buy calls when you expect the price to rise.
• A put gives the right to sell the underlying at the strike. You buy puts when you expect the price to fall.

Buyer versus seller (writer)

Every option has two sides, and their risk profiles are wildly different:

• The buyer pays the premium up front. Their maximum loss is that premium — no more. Their potential gain can be large.
• The seller (writer) receives the premium up front. That premium is their maximum gain. Their potential loss can be very large — for a naked call, theoretically unlimited.

A worked example

A stock trades at US$100. You buy one call, strike 100, for a premium of US$3 (one equity contract = 100 shares, so US$300 total).

If at expiry the stock is 110:
  exercise -> buy at 100, worth 110 -> +10/share
  minus 3 premium -> +7/share -> +700 net
If the stock is 95 (or anything below 100):
  let it expire worthless -> lose the 3 premium -> -300

Risk, stated honestly: as the buyer you can lose 100% of the premium. As the seller you collected US$300 but, if the stock soared to 200, you would owe US$10,000 minus the premium. Selling options is not "easy income" — it is taking on open-ended risk for a fixed reward.