What you will learn
- Calls and puts
- Payoff versus profit
- Greeks
- Implied volatility
Calls and puts
A call gives its holder rights under the contract to buy or receive the specified settlement exposure; a put concerns selling or the corresponding settlement. Exercise style, underlying and settlement terms must be read rather than assumed.
Payoff versus profit
An option buyer pays premium; an option writer receives premium while accepting contractual obligations. Their risk profiles differ. Describing both as an options trade conceals who holds the right and who owes performance.
Greeks
Intrinsic value describes immediate exercise value under a simplified payoff view. Time value reflects other factors before expiry. An option can lose value even when the underlying moves in the anticipated direction if other pricing factors dominate.
Implied volatility
Price sensitivity is nonlinear. The change in an option's value depends on underlying price, volatility, time and other inputs. A fixed futures-style multiplier applied only to the underlying move is not a complete option valuation model.
Worked example
A call with strike 100 expires when the underlying settlement reference is 108. Its intrinsic payoff is 8 per unit under a simple cash-payoff example. If premium paid was 5, the expiry profit is 3 before costs.
Try it yourself
Calculate the same call's expiry profit when the settlement reference is 102, assuming premium 5 and multiplier one.
Show the worked solution
Payoff is max(102−100,0)=2, so profit is −3 before costs. The underlying finishing above strike does not necessarily make the purchased call profitable after premium.
Apply this to your course project
Model a futures roll and option payoff under stressed scenarios.
Keep the calculation inputs, assumptions and decisions with your work. Practical exercises are self-reviewed; the scored knowledge checks assess the questions shown, not an independent certification of practical competence.