Options payoffs and strategies
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
16 min read · updated November 3, 2026
Options are most of what an equity derivatives desk trades. A client wants to protect a holding through an earnings date, earn income on stock it owns, or bet on a big move without caring which way. Each of those is an option structure, and a salesperson's job is to hear the view in the client's words and turn it into the right one.
In the interview, options questions start simple and get precise fast. "What is a put?" becomes "what is your break-even?", then "draw me the payoff", then "the call looks expensive against the put; what do you do?" The candidates who do well can price a position at expiry in their head and say what view each structure expresses. This lesson builds that, with one set of option prices used all the way through.
Every option position is a view on two things: which way the stock goes, and whether it moves more or less than the market has already priced into the premium. Buyers pay a known premium for a payoff that bends in their favor; sellers collect it and take the tail. And because a call and a put at the same strike can be combined into the stock itself, their prices are tied together by put-call parity, which is how traders check whether an option is mispriced.
What an option is
A call option gives the buyer the right, but not the obligation, to buy a stock at a set price by a set date. A put option gives the right to sell. The set price is the strike price, and the date is the expiry. The buyer, who is long the option, pays the seller, who is short it (also called the writer), an up-front price called the premium. The buyer's loss is capped at the premium. The seller keeps the premium and takes on the obligation.
US listed stock options are on 100 shares per contract and clear through the Options Clearing Corporation, which stands between every buyer and seller so neither has to trust the other. Prices are quoted per share.
American or European. An American option can be exercised on any day up to expiry; a European one only at expiry. Most US single-stock options are American. Major index options are usually European and settle in cash. Exercising a call early on a stock with no dividend is never the best choice, because you throw away its time value; you would sell the option instead. The exception is just before a dividend, which the option holder does not receive.
Warrants. A listed option is a contract between two investors, and exercising it creates no new shares. A warrant is a call issued by the company itself, often attached to a bond or a SPAC unit, usually lasting years. Exercising it creates new shares, which dilutes existing holders.
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Frequently asked
- What is the difference between a call and a put?
- A call gives the buyer the right to buy a stock at a set price, the strike, by a set date. A put gives the right to sell at the strike. The buyer pays a premium for that right and can lose no more than the premium; the seller collects it and takes on the obligation.
- What is put-call parity?
- For European options on a stock with no dividends, a call minus a put at the same strike and expiry equals the stock price minus the present value of the strike. It holds because a long call plus a short put ends up owning the stock for the strike price whatever happens. If market prices break it, a conversion or reversal locks in the gap with no market risk.
- When does a straddle make money?
- A long straddle, a call and a put at the same strike, makes money at expiry only if the stock ends further from the strike than the two premiums combined. It is a bet that the stock moves more than the market has priced, not just that it moves. If everyone already expects a big move, the straddle is expensive and being right about the move is not enough.
- What is a zero-cost collar?
- A hedge on stock you own: buy a put below the market for protection and sell a call above the market to pay for it, with strikes chosen so the two premiums roughly cancel. It costs nothing up front, but you give away every gain above the call strike.
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