What you will learn
- Calls and puts
- Long versus short premium
- Intrinsic and time value
- Expiry payoff versus mark-to-market
Calls and puts
A call and put have different payoff directions under their contract terms. For simplified expiry examples, call payoff is max(underlying minus strike, zero), while put payoff reverses that difference. Premium and multiplier are added separately to profit calculations.
Long versus short premium
Long premium pays for contractual rights; short premium accepts obligations in exchange for premium. Receiving cash at entry does not establish profit, because the later liability can exceed the initial receipt.
Intrinsic and time value
Intrinsic value is the positive immediate exercise component in a simplified model. Time value and other pricing effects matter before expiry. A position's current market value cannot generally be read from its expiry payoff alone.
Expiry payoff versus mark-to-market
Distinguish payoff from profit. Profit includes premium, fees and the actual closing or settlement terms. A diagram that omits the initial premium can make a losing position appear profitable.
Worked example
A put with strike 100 expires at underlying 94. Payoff is 6. If premium was 4 and multiplier one, profit is 2 before costs. At underlying 99, payoff is 1 and profit is −3.
Try it yourself
Calculate the expiry profit of the same purchased put when the underlying is 105. Explain the role of premium.
Show the worked solution
The put expires with zero intrinsic payoff under the simplified terms, so profit is −4 before costs. The premium paid is a cost even when no exercise value remains.
Apply this to your course project
Produce payoff and scenario tables for a defined-risk illustrative spread.
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.