The Four Basic Positions

Four legs, two mirror pairs

Every option has a buyer and a seller. Flip the Long Call curve over the “P&L 0” line and you get the Short Call: what one side makes is exactly what the other side loses (before fees).

Buyers need a move, sellers count on time

The buyer pays the premium and has limited losses, but needs the stock to move far enough. The seller collects up front with capped profit, and as long as the stock “behaves”, the time value slowly becomes theirs.

Same view, two ways to express it

When bullish you can buy a Call or sell a Put; when bearish you can buy a Put or sell a Call. Same direction, completely different risk shapes: one fears no movement, the other fears a big move.

Key takeaways

• The four legs mirror each other in pairs: on the same contract, what the buyer makes is exactly what the seller loses (ignoring fees).
• Buyers (long) have limited losses and need the market to move; sellers (short) have limited gains and make money from time passing.
• If you're bullish you can buy a call or sell a put; if you're bearish you can buy a put or sell a call. Same direction, different risk shape.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Long Call with a $6 premium: drag the stock price at expiration to $130. How much do you make per share? Then switch to Short Call: what's the result at the same price?
2. Watch the gray dashed line on the chart (the counterparty): as you drag the stock price, are your P&L and theirs always equal and opposite?
3. Switch to Long Put and change the premium from $6 to $10: where does the breakeven move to from $94?
4. Switch through the four legs and look at “Max profit / loss”: which one has a maximum loss of ∞? Which one has a maximum profit of ∞?

Quiz and explanations

1. How do the payoff curves of a short call and a long call relate?

Answer: They're mirror images across the zero P&L line.The seller's gain is the buyer's loss.

2. You're bearish but don't want unlimited risk. What should you choose?

Answer: Long Put.A long put can lose at most the premium.

3. You think the stock won't fall below $95 within a month and you want to earn some premium. What should you do?

Answer: Sell a $95-strike put.Selling a put bets on "it won't fall": if the stock stays above $95, the put expires worthless and you keep the whole premium. Selling a $95 call bets on "it won't rise" instead.

Terms in this lesson

• breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
• call option (Call): The right to buy the underlying at the strike price; the higher the stock goes, the more it's worth.
• intrinsic value (Intrinsic Value): What you'd get by exercising right now; for a call, max(stock price − strike, 0).
• premium (Premium): The price of an option, paid by the buyer to the seller; it's the most the buyer can lose.
• put option (Put): The right to sell the underlying at the strike price; the lower the stock goes, the more it's worth.
• strike price (Strike): The price written into an option contract at which you can buy or sell.
• time value (Time Value): The part of an option's price above its intrinsic value, reflecting the chance it gains value before expiry; it melts away over time.
• option writer (Writer): The side that sells an option and collects the premium, taking on the obligation if the buyer exercises.