Options explained simply: calls and puts by example

Put simply, an option is a contract that gives the buyer a right but no obligation. A call allows the purchase of an underlying asset at a fixed price, a put allows its sale. The buyer pays a premium for this right to the seller, who in return takes on an obligation.

What is an option?

An option is an agreement between a buyer and a seller relating to an underlying asset. The underlying is the asset the option refers to, such as shares, bonds, precious metals, currencies, interest rates or indices.

Depending on the type of option (see below), the buyer may buy or sell the underlying at a set price on or up to the expiration date. This price stays fixed, wherever the market price stands at that point.

The seller of an option is called the option writer. The writer receives the premium. In return, the writer must deliver or take delivery of the underlying on request, regardless of the current price.

Which terms do you need to know for options?

The premium consists of intrinsic value and time value. Only an option that is ‘in the money’ has intrinsic value, meaning that exercising it would bring an immediate advantage. If the price is on the unfavourable side of the strike, the option is ‘out of the money’. Time value depends on factors including the remaining term and volatility, that is, how widely the price fluctuates. For more on this, see the article on how volatility affects option prices.

How does buying and selling a call option work?

Someone who buys a call holds a long call and expects prices to rise. If the price at expiry is above the strike, the holder can buy more cheaply than on the market. If it is below, the option expires and the loss is limited to the premium.

Someone who sells a call holds a short call and receives the premium straight away. If the price rises above the strike, the seller must still deliver at the strike price. The premium is therefore compensation for a risk taken on.

For a call, the break-even point is the strike price plus the premium.

Someone who owns the underlying and sells a call on it holds a covered call. For more, see the article on option-writing strategies such as the covered call.

How does buying and selling a put option work?

Someone who buys a put holds a long put. The holder expects prices to fall or wants to hedge an existing position. If the price at expiry is below the strike, the holder can sell at a higher price than on the market. Otherwise the option expires and the loss remains limited to the premium.

Someone who sells a put holds a short put. The seller receives the premium and must take delivery of the underlying at the strike price on request. If the price falls sharply, the seller ends up paying more than the underlying is still worth.

For a put, the break-even point is the strike price minus the premium.

What do the payoff profiles look like at expiry?

A payoff profile shows the profit or loss of a position on the expiration date, depending on the price. The chart compares the four basic positions, per share with a strike of 100 and a premium of 5, excluding costs.

The long call stays flat up to the strike and rises after that. The long put stays flat above the strike and rises the further the price falls below it. Each short position is the mirror image. Before costs, one side's profit equals the other side's loss.

The extreme values for the put arise if the price falls to zero.

What risks do buyers and sellers carry?

Risks for buyers

• Total loss of the premium: If an option expires worthless, the entire premium is lost.
• Loss of time value: As a rule, the further out of the money an option is, the greater the loss in value. Shortly before expiry it usually increases markedly.
• Loss in value despite rising prices: A call can lose value even when the price stays the same or rises. The reasons include declining time value, supply and demand, or a change in volatility.
• Leverage: An option costs less than the underlying. Price changes therefore have a stronger effect on its price, in both directions.

Risks for sellers

• Uncovered call: The seller does not own the underlying. The price can rise far above the strike, so the risk of loss is theoretically unlimited. Obtaining the underlying may be very expensive or impossible.
• Covered call: If the price rises above the strike, the seller misses out on the price gain. The position offers no protection against falling prices. The premium only reduces the loss.
• Short put: If the price falls below the strike, there is a risk of substantial losses. They are limited, but high: at most the strike price minus the premium per unit of the underlying. In the case of delivery, the seller must take the underlying even if it can hardly be sold.
• Collateral and margin calls: Sellers must post collateral during the term. If it is not sufficient, the securities firm, meaning the bank or broker, can demand more. If this is not provided, it can close the position unilaterally. Losses can far exceed the collateral.
• Exercise at an inopportune time: American options can be exercised at any time, including in very unfavourable market conditions.

For both sides

Fees and the bid-ask spread reduce the result. Closing a position early requires an offsetting transaction. The Swiss Bankers Association describes these risks in its brochure ‘Risks Involved in Trading Financial Instruments’ (June 2023 edition).

Where are options traded, and what is a warrant?

Exchange-traded options are standardised contracts and are not issued as securities. They are processed through a central clearing house, which settles the trades and acts as counterparty. Options on Swiss shares and on the Swiss Market Index (SMI) are traded on Eurex in CHF (contract data as of October 2026).

• Equity options, using Nestlé as an example: The shares are physically delivered two trading days after exercise. The last trading day is usually the third Friday of the expiry month.
• SMI options: One index point equals CHF 10. The options are European-style and cash-settled.

A warrant, by contrast, is an option in the form of a security. In Germany and Austria it is called an Optionsschein. The terms are set by the issuer, that is, the institution that issues the warrant. The issuer is also the counterparty. Its value therefore also depends on whether the issuer can meet its obligations (issuer risk).

Conclusion: options explained simply

An option separates rights from obligations. The buyer pays a premium for a right, and the option writer receives it in return for an obligation. A call relates to the purchase of the underlying, a put to its sale. The strike price and the premium determine the price at which a position shows a profit or a loss. For buyers, the loss is limited to the premium. For sellers, it can be a multiple of that amount.