WTF is an Option? Calls & Puts

Lesson 1: WTF is an Option?

You've seen the screenshots. Some guy on r/wallstreetbets turns $5,000 into $500,000 overnight, or more commonly, $500,000 into $5,000. The instrument behind both outcomes? Options.

Let's cut through the nonsense. An option is a derivative contract that gives you the right, but not the obligation, to buy or sell an underlying asset at a specific price before a specific date. That's it. You're buying (or selling) a choice.

Call Options

A call option gives the buyer the right to buy 100 shares of a stock at the strike price before expiration.

WSB Translation: "I think this stock is going UP. I buy a call. If it moons, I print tendies. If it tanks, I lose my premium." 🚀
Stock Price at Expiry → Profit / Loss Strike $100 Max Loss = Premium Unlimited Profit Break-even $105 Long Call P&L

Put Options

A put option gives the buyer the right to sell 100 shares at the strike price before expiration.

WSB Translation: "I think this stock is going DOWN. I buy a put. If it craters, I print. If not, I'm out the premium." 📉
Stock Price at Expiry → Profit / Loss Strike $100 Max Loss = Premium Profit Capped at $0 Stock Break-even $95 Long Put P&L

Buyer vs. Seller

Buyer (Long)Seller / Writer (Short)
Max ProfitUnlimited (calls) / Very large (puts)Limited to premium received
Max LossLimited to premium paidUnlimited (naked calls) / Very large (naked puts)
CostPay premium upfrontReceive premium upfront (collateral required)
Brain Cells RequiredFewerMany more
⚠️ The single most important table in options: Buyers risk what they paid. Sellers risk far more than they received. The guy who sold naked calls on GME in January 2021 found this out the hard way.

The Premium

The premium is the price you pay (or receive) for the option contract. It has two parts:

  • Intrinsic Value — how much the option is worth if exercised right now (for a $100 strike call when the stock is at $107 → $7 intrinsic)
  • Extrinsic Value / Time Value — the extra premium above intrinsic value, driven by time until expiration and implied volatility. This decays to $0 by expiry.
Key Insight: You don't need the stock to hit your strike to make money. If you bought a call and the stock moves toward your strike, the option's value increases. You can sell the option itself for a profit before expiration. Most traders never exercise.

🧠 Knowledge Check

1. You buy a $50 strike call for $2 when the stock is at $48. At expiration, the stock is at $57. What's your profit per share?

2. What is the MAXIMUM loss for someone who BUYS a put option?

3. True or False: Most options traders hold contracts until expiration and exercise them.

Further Reading