Chapter 1 of 9
Calls, puts, buyers and writers
Start with rights and obligations, then derive all four basic expiry payoff relationships.
In this chapter
A right has a price and a counterparty #
A call gives its holder a defined right associated with buying at a strike; a put gives a defined right associated with selling. The writer takes the corresponding obligation if exercise and assignment occur under the contract. Whether settlement involves an asset, cash or another contract depends on the product.
The buyer pays a premium. That premium is separate from the strike value and from the margin required of a writer. A quote of 20 per unit can represent a total payment of 20 multiplied by all units in the position. Small-looking premiums can therefore involve meaningful sums.
Derive the expiry payoff #
Let S be the settlement reference and K the strike. A long call’s intrinsic payoff per unit is max(S − K, 0); a long put’s is max(K − S, 0). Subtract premium paid to obtain the buyer’s expiry P&L before costs. A writer has the opposite payoff and receives the premium.
For an isolated long option, the premium-based price loss is limited to what was paid, but expiry-related delivery funding, charges and subsequent exposure need separate treatment. A short uncovered call has no finite upside-price loss bound. A short put can lose roughly strike minus premium per unit if a nonnegative underlying falls to zero.
Expiry math is not an early-exit price #
Before expiry, option value also reflects remaining time and uncertainty. A payoff diagram based on the final underlying price is not a quote for closing the option today. Liquidity and the bid–ask spread also affect execution.
Use the options expiry-payoff calculator to compare hypothetical scenarios. It does not estimate today’s option premium, exercise taxes, broker margin or suitability.
Decision lab: The right and the obligation belong to different sides #
A buyer pays premium for an exercise right; a writer accepts the matching contractual obligation. A small premium does not mean a small notional exposure. A label such as “income strategy” does not remove a writer’s tail loss or funding requirements.
Compare buyer and writer cash flows at inception and under several fictional expiry outcomes. Mark premium, multiplier, exercise style and settlement separately. Distinguish an expiry loss formula from a promise about the account’s ability to maintain the position.
Hypothetical worked example
A call needs more than a favorable direction
A fictional call has strike 100 and premium 8. At expiry with S = 105, its intrinsic payoff is 5 and P&L is −3 per unit. The underlying rose beyond strike, but not enough to cover premium.
At S = 120, intrinsic payoff is 20 and buyer P&L is +12. At S = 95, payoff is zero and buyer P&L is −8. For 50 units, multiply each result by 50, then deduct costs.
The call writer has the opposite price P&L before costs. That symmetry does not mean the two sides have identical funding, assignment or collateral requirements.
Common mistakes
- Confusing strike value with premium payable.
- Assuming a correct directional observation guarantees an option profit.
A long call with strike 100 and premium 8 expires at 105. Its pre-cost P&L per unit is what?
Make this chapter useful
Can you defend the reasoning?
Before moving on, answer the self-check in your own words and write why each alternative fails. Use the worked example to test that explanation. Then apply it in the module research task; keep the assumptions and the evidence that could change your answer.
Sources and further reading
- NSE individual-security derivatives specifications ↗
- NSE Clearing: equity derivatives margins ↗
- SEBI investor education ↗
Further-reading references from the curriculum source list. Contract sizes, expiry calendars, settlement references, margin parameters and tax treatment can change; verify the current operative documents for the actual product. Worked figures are illustrative, not current quotes.
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