Calls vs puts: rights and obligations
A call gives its buyer the right to buy the underlying asset at the strike price under the contract's terms. A put gives its buyer the right to sell. The option's expiration limits how long that right exists. The buyer pays a premium to acquire it.
For physically settled equity options, a seller assigned on a call must deliver shares, while a seller assigned on a put must buy them. Receiving a premium does not remove that obligation. Options trading normally requires specific broker approval and is not suitable for every investor.
| Position | Contract role | What to plan for |
|---|---|---|
| Call buyer | Right to buy shares at the strike | Premium loss and funding an exercise |
| Put buyer | Right to sell shares at the strike | Premium loss and delivery on exercise |
| Call seller | Obligation to deliver if assigned | Delivery and potentially unlimited uncovered loss |
| Put seller | Obligation to buy if assigned | Funding the purchase and a falling share price |
Source: FINRA: Options
Read the full contract, not just the price
Check the underlying, call or put designation, strike, expiration, multiplier, exercise style and settlement method. A standard US equity option typically represents 100 shares, so a quoted premium of $2.40 normally costs $240 for one contract, before fees. Adjusted contracts can have different deliverables; verify the specifications.
American-style options can be exercised before expiration. European-style options restrict exercise to the specified expiration exercise period. Equity and ETF options commonly involve share delivery, while many index options settle in cash. Do not apply an equity-option example to an index contract without checking its terms.
Write the full commitment next to the premium. One physically settled $50-strike call covering 100 shares requires $5,000 to buy the shares if exercised, in addition to the premium already paid and any fees. The $240 entry cost is not the same as the cash needed to exercise.
Sources: OIC: Equity vs. Index Options; OIC: Exercising Options
Worked examples: a long call and a long put
Assume hypothetical standard contracts covering 100 shares, each bought for a $2 premium, with a $50 strike. Each costs $200 before fees. The following values illustrate the option payoff at expiration less that premium. They exclude commissions, taxes, exercise costs and any subsequent share-position gains or losses.
| Stock price at expiration | Long $50 call | Long $50 put |
|---|---|---|
| $44 | −$200 | +$400 |
| $48 | −$200 | $0 |
| $50 | −$200 | −$200 |
| $52 | $0 | −$200 |
| $56 | +$400 | −$200 |
The call's expiration break-even is $52: the $50 strike plus the $2 premium. At $56, its intrinsic value is $600 and its profit after the $200 premium is $400. The put's break-even is $48: the $50 strike minus the $2 premium. At $44, it also has $600 of intrinsic value and $400 of profit after premium.
These calculations do not predict what you could sell either option for before expiration. They also show why being right about direction is not enough: a stock at $51 leaves the call in the money but still $100 below the original premium cost at expiration, before fees.
Why a premium changes before expiration
An option's price includes intrinsic value, if any, and extrinsic or time value. Time remaining and expected volatility influence that extra value alongside the underlying price and other inputs. All else equal, the passage of time reduces an option's time value; a decline in implied volatility can also reduce the premium.
That is why a call's market value can fall even after a modest rise in the stock. The gain from the price move can be outweighed by changes in time value or volatility. Comparing two options only by which has the cheaper premium ignores strike, duration and sensitivity to changing conditions.
Source: OIC: Options Pricing
Exercise, assignment and expiration need a plan
Selling an option you own to close a position is different from exercising it. Exercise uses the contractual right; assignment requires an option seller to fulfill the other side. An American-style short position can be assigned before expiration, not just on the final day.
In-the-money equity options are generally subject to exercise-by-exception at expiration unless contrary instructions apply. Broker deadlines and account handling policies matter. Do not assume an option simply disappears because you did not send an instruction. Exercise can leave a share position with funding requirements and continuing market risk.
Before opening a position, decide how you would handle closing it, exercise or assignment. Check the broker's deadlines, available funds, delivery requirements and potential actions if the account cannot support the resulting position.
A checklist before trading listed options
TGAB lists US-listed options among its planned launch markets. Availability, permissions and final terms must be confirmed when onboarding opens. Learning the mechanics does not establish whether an options strategy suits your circumstances.
- Read the current Characteristics and Risks of Standardized Options disclosure linked below, alongside your broker's agreements.
- Identify the maximum loss for the complete position. A purchased option can lose its entire premium; some sold options carry much greater risk, including unlimited loss on an uncovered call.
- Check the bid-ask spread, available size and order price. A last traded premium is not an executable quote.
- Calculate both the premium outlay and any potential share purchase or delivery obligation.
- Confirm account approval, supported strategies, commissions and exercise or assignment charges before proceeding.
Source: OCC: Characteristics and Risks of Standardized Options
Common questions
Does one options contract always represent 100 shares?
No. That is typical for a standard equity option, but corporate actions can produce adjusted contracts. Index contracts also use different specifications. Confirm the multiplier and deliverable for the exact contract.
Can an option buyer lose more than the premium?
The purchased option itself can lose its full premium, plus transaction costs. Exercising it may create a stock position with additional funding needs and losses. The risk of that resulting position must be considered separately.
Is an in-the-money option automatically profitable?
No. In the money describes intrinsic value relative to the strike. Your profit also depends on the premium paid and costs, as the expiration examples above demonstrate.
Sources & further reading
Prepared by TGAB using the investor education resources below. Sources checked on . Examples are hypothetical and use US dollars.
- FINRA: Options
- OIC: Equity vs. Index Options
- OIC: Exercising Options
- OIC: Options Pricing
- OIC: Options Assignment
- OCC: Characteristics and Risks of Standardized Options
This guide provides general education, not a personal investment recommendation. Trading can result in loss of capital. Product access depends on eligibility, permissions and final launch terms. Read the risk disclosure.