Directional Trading · Options Trading Guide

Buying a call or put gives a defined option premium at risk, but selecting the right direction is only one part of a successful trade.

State the thesis and deadline

A long call expresses a view that the underlying can rise enough within a relevant period. A long put expresses a view that it can fall. Neither requires exercise to realise a trading gain. Closing by selling the option can preserve remaining extrinsic value. Exercise and continued stock exposure require a separate decision.

Calculate a call scenario

A stock is $60. A 60 call costs $4 per share. One contract costs $400. At expiration with the stock at $68, intrinsic value is $800 and gross profit is $400. At $62, the option has $200 value but loses $200 after premium. At $60 or lower, the full premium is lost. Breakeven is $64 before costs, while upside potential has no fixed ceiling.

Calculate the put counterpart

A 60 put costing $3 has an expiration breakeven of $57. At a stock price of $50, its $1,000 intrinsic value produces $700 gross profit per standard contract. If the stock reached zero, maximum gross profit would be $5,700. Unlike a call’s unlimited theoretical upside, an equity put’s gain is bounded because the stock cannot fall below zero.

Compare options with shares

A lower cash outlay can produce a larger percentage loss. Buying four $400 calls risks $1,600 in premiums. A stock position has no contractual expiration, while options can expire before the thesis develops. Compare absolute cash loss, horizon, liquidity and volatility sensitivity. An option can appreciate before its expiration breakeven is reached, or decline despite a favourable stock move. Set an exit rule tied to the research question and available quotes rather than treating the final payoff diagram as a prediction of tomorrow’s price.

Try it yourself

A put bought for $2.50 is sold before expiration for $3.10. One standard contract incurs $6 total costs. What is net profit?

Show the worked answer

The premium gain is $0.60 × 100 = $60. Net profit after costs is $54.

Further reading

Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.

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