Call Options vs Put Options
A call option gives you the right to buy 100 shares at a fixed price (the strike) before expiration. You buy calls when you expect the stock to go up. If you buy a $100 call for $3 and the stock hits $120, each share is worth $20 in profit minus the $3 premium, so $17 per share. Multiply by 100 shares per contract: $1,700 profit on a $300 investment.
A put option gives you the right to sell 100 shares at the strike price. You buy puts when you expect the stock to drop. If you buy a $100 put for $2 and the stock falls to $80, your intrinsic value is $20 per share minus the $2 premium, netting $18 per share. That is $1,800 on a $200 investment. Puts also work as portfolio insurance—they cap your downside if you own the underlying stock.
Each standard options contract controls 100 shares. Your total cost to enter a trade is the premium multiplied by 100 multiplied by the number of contracts. This premium is the maximum you can lose on a long option—your risk is defined the moment you buy.
How Break-Even Works for Options
Break-even is the stock price where your profit at expiration is exactly $0—you recover the premium you paid but earn nothing extra. For calls, break-even equals the strike price plus the premium. A $100 call with a $5 premium breaks even at $105. For puts, break-even equals the strike price minus the premium. A $100 put with a $4 premium breaks even at $96.
Below break-even (for calls) or above it (for puts), the option expires at a loss. Your maximum loss is always the premium paid. Above break-even for calls, every dollar the stock moves adds a dollar of profit per share. The same is true below break-even for puts. That is why options offer leveraged returns—a 5% move in the stock can mean a 50%+ return on the option.
Break-Even Formulas
| Option Type | Break-Even Formula | Example |
|---|---|---|
| Long Call | Strike + Premium | $100 + $3 = $103 |
| Long Put | Strike − Premium | $100 − $3 = $97 |
Max Profit and Max Loss Scenarios
For a long call, your max loss is the premium paid. If the stock closes at or below the strike at expiration, the call expires worthless and you lose the full premium. Max profit is theoretically unlimited—the stock can rise without limit, and every dollar above break-even adds to your gain.
For a long put, max loss is also the premium paid. If the stock closes at or above the strike, the put expires worthless. Max profit occurs if the stock drops to $0, giving you (strike − premium) × 100 × contracts. In practice, stocks rarely hit zero, but deep drops can still produce massive returns on a small premium.
Max Profit/Loss Quick Reference
| Scenario | Long Call | Long Put |
|---|---|---|
| Max Profit | Unlimited | (Strike − Premium) × Shares |
| Max Loss | Premium × Shares | Premium × Shares |
| Break-Even | Strike + Premium | Strike − Premium |
Time Decay: Why Options Lose Value Every Day
Every option has a ticking clock. Time value (also called extrinsic value) is the portion of the premium above intrinsic value. A $100 call trading at $5 when the stock is at $102 has $2 of intrinsic value and $3 of time value. That $3 evaporates by expiration—guaranteed.
Time decay (theta) accelerates in the final 30 days before expiration. An option with 90 days left might lose $0.02 per day. The same option with 10 days left might lose $0.15 per day. This is why short-dated options are cheaper—and riskier. If the stock does not move fast enough, theta eats your premium before the directional move pays off.
The practical takeaway: if you are buying options, give yourself enough time. Options with 45-60 days to expiration balance cost against time decay risk. Weeklies (7 days or less) are cheap but have the highest theta—the stock needs to move immediately or you lose.
Intrinsic Value vs Time Value
Intrinsic value is the real, exercisable value of an option right now. For a call, it is the stock price minus the strike (if positive). For a put, it is the strike minus the stock price (if positive). An option with intrinsic value is "in the money" (ITM). One without is "out of the money" (OTM).
Time value is everything else—the market's bet that the stock could move further before expiration. A deep in-the-money option has mostly intrinsic value and low time value. A far out-of-the-money option is pure time value—if the stock does not reach the strike, it expires worthless. The calculator above shows both values so you can see exactly what you are paying for.
To model how a stock split affects share count and price, try the stock split calculator. For broader investment return analysis beyond options, use the investment return calculator.