Strategies · A practical guide
Options: choose the payoff before the trade
What exposure are you trying to create, protect, or give up?
Educational content · Updated · Prepared with AI assistance
01
Begin with the contract
A call gives its holder the right to buy, and a put the right to sell, under the contract terms. The seller takes the corresponding obligation if assigned. Check strike, expiry, multiplier, settlement, and exercise style; do not assume every contract represents 100 shares.
02
Long call: a directional position with a deadline
The buyer pays a premium and can lose that premium. For a standalone long call at expiry, profit per share is max(stock price − strike, 0) − premium. Before expiry, time remaining and implied volatility also affect value. Being right about direction can still lose money.
03
Protective put: pay for a defined expiry floor
Holding stock and buying a put adds downside protection for the covered quantity and contract term. Premium is a real cost, and protection expires. In the example below, the stock cost, strike, and put premium jointly determine the downside; the put alone is not the whole portfolio.
04
Covered call: premium in exchange for upside
Holding stock and selling a call caps gains above the strike in exchange for premium. The stock can still suffer a large loss. American-style short calls can be assigned before expiry, particularly around dividends. “Income” describes a cash receipt, not a guaranteed net return.
05
Check operations before the payoff diagram
Know brokerage approval, exercise deadlines, settlement, and the cash or shares needed after exercise or assignment. These simplified expiry examples omit fees, tax, dividends, financing, and execution costs. They are education, not a suitability determination.
Hypothetical worked example
Three positions at expiry, all per 100 shares
| Underlying at expiry | Long 100 call, premium 5 | Stock at 100 + 95 put, cost 3 | Stock at 100 − 110 call, receipt 2 |
|---|---|---|---|
| $80 | −$500 | −$800 | −$1,800 |
| $100 | −$500 | −$300 | +$200 |
| $120 | +$1,500 | +$1,700 | +$1,200 |
What the example shows: Each column is a separate hypothetical position with a 100-share multiplier. Initial costs differ: $500, $10,300, and $9,800 net. The call breakeven is $105; the protective position’s expiry loss is capped at $800 under these assumptions; the covered call’s maximum gain is $1,200. The existing calculator models one option only, not the two combined stock-and-option positions.
Try before you reveal
Check your understanding
The stock rises from $100 to $103 by expiry. Is the 100 call bought for $5 profitable?
Show the explanation
No. Its $3 intrinsic payoff is below the $5 premium: a $2 loss per share, or $200 for a 100-share contract, before costs.
Put it to work
- Write the purpose and complete position.
- Calculate premium, breakeven, and worst case.
- Test flat, favorable, and adverse expiry prices.
- Check liquidity, contract terms, and exercise or assignment procedures.
Sources and boundaries
Sources support the underlying concepts. The examples, exercises, and research questions are this site’s educational illustrations. They are not live quotes, return forecasts, or personalized recommendations. Sources checked September 27, 2026.