Deep Dive
Rights vs Obligations
This is the single most important concept in options. If you remember nothing else, remember this page.
The Golden Rules
The Buyer
Owners / Holders
You have the RIGHT (Choice).
You are the boss. You can choose to exercise your option if it's profitable, or walk away if it's not. You are never forced to do anything.
Max Risk: Premium Paid Only
The Seller
Writers / Creators
You have the OBLIGATION (Promise).
You signed a contract. If the buyer decides to exercise, you MUST fulfill your end of the deal. You have no choice in the matter.
Max Risk: Potentially Unlimited
How it plays out
Call Option
Strike: $150
Call Buyer
Has the right to BUY shares at $150.
"I can buy this stock from you for $150, even if it's trading at $200!"
Call Seller
Has the obligation to SELL shares at $150.
"I must sell this stock to you for $150, even if I could sell it to someone else for $200."
Put Option
Strike: $150
Put Buyer
Has the right to SELL shares at $150.
"I can sell this stock to you for $150, even if it's only worth $100!"
Put Seller
Has the obligation to BUY shares at $150.
"I must buy this stock from you for $150, even if I can only sell it for $100."
The Profit Math
Call Option
Strike $150
Scenario:Stock rises to $175
Gross Profit+$25.00
Less Premium Paid (-)-$5.00
Net Profit (Per Share)+$20.00
Total Profit/Loss (x100 Shares)
+$2,000.00
Put Option
Strike $150
Scenario:Stock falls to $125
Gross Profit+$25.00
Less Premium Paid (-)-$5.00
Net Profit (Per Share)+$20.00
Total Profit/Loss (x100 Shares)
+$2,000.00