An option is a right, not an obligation — and that asymmetry has a price.
What you will learn
Define calls and puts
Understand strike, premium, expiry
Read a payoff diagram
Call and put payoff
Call and put payoff
Risk vs return
Risk vs return
Calls and puts
A call gives the buyer the right (not obligation) to buy an asset at a set strike price before expiry. A put gives the right to sell. The buyer pays a premium for this right; the seller collects it and takes on the obligation.
💡 A call in action
You buy a call with a $100 strike for $5 (premium). At expiry, if the asset is $120, you can buy at $100 — worth $20 — for a net $15 profit. If it's $80, you let it expire worthless and lose only your $5 premium. Loss is capped; upside is not.
The option's value
An option's premium has two parts: intrinsic value (how much it's in-the-money now) and time value (the chance it moves favorably before expiry). Time value decays to zero at expiry — the 'theta' you'll meet next week.
Buyer vs seller
The buyer has limited risk (the premium) and unlimited potential. The seller has limited profit (the premium) and large potential loss. Most retail traders buy options; most professionals understand selling them — for the income and the odds.
💡 Why sellers often win
Sellers profit when the option expires worthless — which happens to most options. But when they're wrong, losses can be severe (selling a naked call has unlimited risk). Selling options is like selling insurance: steady premiums, occasional big payouts.
The Fibonacci & Elliott link
Options live on top of price, and price — as your Fibonacci/Elliott course showed — often respects retracement levels and wave structures. Options traders use those same levels to pick strikes and expiries, combining structure with the right to act.
❓ Quick check
The maximum loss for an option BUYER is:
A) Unlimited
B) The premium paid
C) The strike price
D) Zero
Buyer's loss is capped at the premium.
(Knowledge check — full exam is next)
Key takeaways
Call = right to buy; put = right to sell; buyer pays premium
Premium = intrinsic value + time value (time decays)
Buyer: capped loss; seller: capped gain, large loss
📝 Weekly Exam — pass with 80% to unlock next week
10 questions. Review the Deep Dive and courses before attempting.
1. A call option gives the right to:
Call = right to buy.
2. A put option gives the right to:
Put = right to sell.
3. The premium is:
Premium = option price.
4. An option buyer's maximum loss is:
Capped at premium.
5. Intrinsic value is:
In-the-money amount.
6. Time value decays to zero:
Time value → 0 at expiry.
7. An option seller has:
Sellers collect premium but face large losses.
8. Buying a $100 call for $5 with the asset at $120 at expiry gives net profit of:
(120−100) − 5 = $15.
9. Selling options is analogous to:
Collect premiums, occasional payouts.
10. Most options at expiry are:
Most expire worthless — why sellers profit.
Your score: —
🛠 Weekly Project
Read one real option chain.
1
Pick a liquid stock and find its options chain.
2
Identify the at-the-money call and put.
3
Note their premiums and how premium changes with strike/expiry.
4
Write 2 sentences on how time value behaves across expiries.