BUS 331 · Investments

Options Explorer

Interactive Module

Master the Building Blocks of Derivatives

Options contracts give you the right — but not the obligation — to buy or sell an asset at a fixed price. This module walks you through how calls and puts are priced and how their payoff profiles shape investment strategy.

📈 Bullish instrument

Call Option

Right to buy the underlying at the strike price. Profits when the stock rises above strike + premium paid.

📉 Bearish instrument

Put Option

Right to sell the underlying at the strike price. Profits when the stock falls below strike − premium paid.

Position Parameters
Breakeven
$105
Max Loss
−$500
At Expiry P&L
—
Moneyness
ATM
Payoff = max(ST − K, 0)
Profit = Payoff − c
where ST = price at expiry

Payoff & Profit at Expiry

Payoff
Profit
Current S
Max Loss
Capped at the premium paid. The worst case is the option expires worthless — you lose only what you paid.
Upside
Theoretically unlimited. Every dollar above the breakeven is pure profit — leverage in action.
Key Insight
A long call is a leveraged bullish bet. You control 100 shares for a fraction of the cost of owning them.
Position Parameters
Breakeven
$105
Max Gain
$500
At Expiry P&L
—
Moneyness
ATM
Profit = c − max(ST − K, 0)
You keep premium if ST ≤ K

Short Call — Payoff & Profit

Payoff
Profit
Current S
Max Gain
Capped at the premium received upfront. Best case: stock stays flat or falls.
Risk Profile
Unlimited downside. If the stock rockets, you must sell at strike — losses grow with every dollar gained.
Who does this?
Writers who are neutral-to-bearish, often as a covered call against stock they already hold.
Position Parameters
Breakeven
$95
Max Loss
−$500
At Expiry P&L
—
Moneyness
ATM
Payoff = max(K − ST, 0)
Profit = Payoff − p
Max profit = K − p (if ST → 0)

Long Put — Payoff & Profit

Payoff
Profit
Current S
Max Loss
Limited to the premium paid. If the stock goes up, you simply don't exercise.
Max Gain
Capped at K − premium (stock can't go below $0). Still a powerful short-side bet.
Key Use Case
Portfolio insurance. Holding a put against stock you own protects against a sharp decline.
Position Parameters
Breakeven
$95
Max Gain
$500
At Expiry P&L
—
Moneyness
ATM
Profit = p − max(K − ST, 0)
You keep premium if ST ≥ K

Short Put — Payoff & Profit

Payoff
Profit
Current S
Max Gain
Capped at the premium received. Best case: stock stays above strike and option expires worthless.
Risk Profile
Large downside if stock collapses — you must buy at strike even as the market price tanks.
Bullish Strategy
Used by investors who want to buy a stock cheaper, collecting premium while they wait for a pullback.

Real-World Scenarios

Click a scenario to see the option strategy, payoff structure, and outcome analysis.

🍎
Bullish bet
AAPL Earnings Play
Anticipating a strong earnings surprise before the quarterly report. Low cost, high leverage.
🛡️
Downside protection
Protective Put
You own 100 shares of MSFT and fear a market correction. Use puts as portfolio insurance.
💰
Income generation
Covered Call
Already long 100 shares of SPY. Sell a call to collect premium and enhance yield in a flat market.

Key Terms

The vocabulary you need to read option chains and discuss strategies fluently.

Strike Price (K)
The fixed price at which the holder can buy (call) or sell (put) the underlying asset.
Premium
The market price of the option contract — what a buyer pays and a writer receives upfront.
Expiration Date
The date on which the option expires. After this, the contract has no value.
In-the-Money (ITM)
Call: S > K. Put: S < K. The option has intrinsic value and would profit if exercised today.
Out-of-the-Money (OTM)
Call: S < K. Put: S > K. No intrinsic value — option would be worthless if exercised now.
At-the-Money (ATM)
S ≈ K. The stock price equals (or is very close to) the strike price.
Intrinsic Value
The immediate exercise value: max(S − K, 0) for calls; max(K − S, 0) for puts.
Time Value
Premium minus intrinsic value. Reflects the chance the option moves ITM before expiry. Decays over time.
Breakeven Point
The stock price at expiry where P&L = 0. Long call: K + c. Long put: K − p.
Put-Call Parity
c − p = S − Ke^(−rT). Links call and put prices; prevents arbitrage.
American vs. European
American: exercise any time before expiry. European: exercise only at expiry. Most equity options are American.
Open Interest
The total number of outstanding option contracts not yet settled. Indicates market participation.