Lesson A4.2 · 2 of 5 · Options and derivatives
Call and put options: profit at expiry and break-even point
At expiry, a call buyer makes money if the price ends above the strike plus the premium, and a put buyer if it ends below the strike minus the premium. A buyer can lose at most the premium. The seller collects the premium, but with an uncovered call the potential loss has no limit.
Terms in this lesson
- Call option
- The right to buy an asset at a set price. You profit if the price rises above it plus the premium.
- Put option
- The right to sell an asset at a set price. You profit if the price falls below it minus the premium.
- Leverage
- You invest more than you have, with money borrowed from your broker.
- Options
- Contracts that give you the right, not the obligation, to buy or sell at a set price.
The buyer and the seller of a call option at expiry
The previous lesson covered what an option is. Here you work out what happens at expiry on one contract of 100 shares. The example is illustrative: the share is at $100, and a call with a $100 strike costs $4 a share, or $400 a contract. Whatever the buyer makes, the seller loses, and the other way round (ignoring commission).
Profit or loss at expiry on one contract against the share price from $70 to $130, for a call with a $100 strike and a $4 premium. The buyer is at -$400 at any price up to $100, then the line rises $100 for every dollar and reaches +$2,600 at $130. The seller is the mirror image: +$400 up to $100, then -$2,600 at $130, and the loss keeps growing beyond the edge of the chart. Illustrative example.
- Below $100: -$400The buyer doesn’t exercise and loses only the premium. The seller keeps the $400.
- At $104: $0The break-even point: strike plus premium, 100 + 4. The $4 a share gained exactly covers the premium.
- At $120: +$1,600(120 - 100 - 4) × 100. Every extra dollar adds $100 for the buyer and takes $100 from the seller.
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Create a free accountThe buyer and the seller of a put option at expiry
A put gains value when the price falls. In the example, the $100 strike put costs $3 a share, or $300 a contract. The buyer’s break-even point is the strike minus the premium: 100 - 3 = $97.
Profit or loss at expiry on one contract against the share price from $70 to $130, for a put with a $100 strike and a $3 premium. The buyer is at +$2,700 at $70, +$200 at $95 and -$300 from $100 upwards. The seller is the mirror image: +$300 from $100 upwards and -$2,700 at $70. Illustrative example.
The seller’s risk: why an uncovered call can lose without limit
| Position (one contract) | Maximum gain | Maximum loss | Break-even |
|---|---|---|---|
| Call buyer | unlimited | the premium: $400 | $104 |
| Uncovered call seller | the premium: $400 | unlimited | $104 |
| Put buyer | $9,700, if the share goes to zero | the premium: $300 | $97 |
| Put seller | the premium: $300 | $9,700, if the share goes to zero | $97 |
The lesson’s examples: $100 strike, $4 call premium, $3 put premium, no commission. FINRA: for the buyer of an option, the premium paid is the maximum loss; for the writer of an uncovered put, the maximum loss is the strike price (here less the premium collected).
Watch out
Why is the loss unlimited on a call sold without the shares?
A share price can rise without limit, and the seller has to deliver the shares at the strike price.
A call is uncovered (or naked) when the seller doesn’t own the shares. If it is exercised, they must buy them in the market at whatever the price is and sell them at $100. At $150 the loss is (150 - 100 - 4) × 100 = $4,600; at $200, $9,600; and so on. FINRA puts it plainly: the maximum loss for the writer of an uncovered call is theoretically unlimited. It is the same logic as short selling.
Option leverage: gains and losses in percentage terms
Options carry leverage: a small premium gives you exposure to 100 shares. FINRA points out that leverage works on the way down too. Here is the difference with the $100 call bought for $4:
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: FINRA, investor page “Options” (the premium is the buyer’s maximum loss; the uncovered call writer’s loss is theoretically unlimited; the uncovered put writer’s maximum loss is the strike price; leverage works on the downside too) and Rule 2360 (approval procedures and minimum equity for uncovered writing); SEC, Investor.gov, “Investor Bulletin: An Introduction to Options” (updated 16 July 2026: holders risk the entire premium, writers may carry even higher risk, some contracts expose writers to unlimited losses). All numerical examples are illustrative and worked out by us, ignoring commission.