The Greeks are a map of sensitivity
Understand what delta, gamma, theta and vega are measuring.
Read articleFOUNDATIONS / 5 MIN READ
Calls, puts, and the right to choose
Start with the difference between owning a share and owning a contract.
A contract with a defined life
A share is an ownership interest. An option is a contract with specified terms and an expiration. A call gives its holder a right to buy; a put gives its holder a right to sell. The strike is the price specified in that contract.
The buyer pays a premium for the right. The seller receives that premium and takes on an obligation. Those two roles can have very different risks. A long option's premium is at risk even when the underlying seems to be moving in the expected direction.
Separate the right from the result
Consider a hypothetical call with a US$100 strike purchased for US$5 per share. At expiration, a US$103 underlying price gives it US$3 of intrinsic value. That does not recover the US$5 premium: the outcome is a US$2 per-share loss before costs.
The break-even in this simplified expiration example is US$105. With a 100-share multiplier, the initial premium is US$500. Always verify the actual contract multiplier and deliverable; adjusted contracts can differ.
The question to carry forward
Before comparing strategies, explain who holds the right, who has the obligation, when the contract ends and what was paid. Try changing the price and premium in our free lesson. Notice the difference between being in the money and making a profit.