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NISM-Series-VIII: Equity Derivatives · Strategies using Equity Futures and Equity Options

Option Payoffs: Long and Short Calls and Puts

Updated 11 October 2026 · Fact-checked

An option payoff is the profit or loss at expiry for a buyer or seller of a call or put. Find the intrinsic value at expiry, add or subtract the premium, and check the breakeven. Buyers risk only the premium. Sellers receive the premium and can face large losses.

Understand Option Payoffs: Long and Short Calls and Puts

An option gives the buyer a right, not an obligation. A call gives the right to buy the underlying at the strike price. A put gives the right to sell at the strike price. The buyer pays a premium to the seller (writer) for this right. The premium is not refunded.

At expiry, an option is worth its intrinsic value. A call is worth the greater of zero and (spot − strike). A put is worth the greater of zero and (strike − spot). The buyer exercises only if this is positive. Otherwise the option expires worthless.

Net profit is the expiry value minus the premium paid, for the buyer. The seller's position is the exact mirror. Whatever the buyer gains, the seller loses, and the other way round. The premium is the seller's maximum gain and the buyer's maximum loss.

The breakeven point is the spot price at which net profit is zero. For a call it is the strike plus the premium. For a put it is the strike minus the premium. Buyer and seller of the same option share the same breakeven.

Learn the four shapes. A long call has limited loss and unlimited profit as the price rises. A short call has limited profit and unlimited loss as the price rises. A long put has limited loss and large profit as the price falls, capped because the price cannot go below zero. A short put has limited profit and large loss as the price falls.

Key formulas to remember

Call value at expiry
Max(0, ST − K)
ST is spot at expiry, K is strike.
Put value at expiry
Max(0, K − ST)
Positive only when spot is below strike.
Long call profit
Max(0, ST − K) − Premium
Maximum loss = premium. Maximum profit is unlimited.
Short call profit
Premium − Max(0, ST − K)
Maximum profit = premium. Maximum loss is unlimited.
Long put profit
Max(0, K − ST) − Premium
Maximum loss = premium. Maximum profit = strike − premium (when spot falls to zero).
Short put profit
Premium − Max(0, K − ST)
Maximum profit = premium. Maximum loss = strike − premium.
Breakeven
Call: K + Premium. Put: K − Premium
Same for buyer and seller. Per-unit figures; multiply by lot size for rupees.

How to solve Option Payoffs: Long and Short Calls and Puts questions

Use the same routine for any payoff question, whatever the position.

  1. 1Identify the position: long (buyer) or short (seller), and call or put.
  2. 2Note strike, premium and lot size from the question.
  3. 3Compute intrinsic value at the given expiry price using the call or put formula.
  4. 4For a buyer, subtract the premium. For a seller, subtract the intrinsic value from the premium.
  5. 5Find the breakeven: strike + premium for a call, strike − premium for a put.
  6. 6State the maximum profit and loss from the four standard shapes.
  7. 7Multiply per-unit profit by lot size if the answer is asked in rupees.

Quickest way: Premium and breakeven shortcut

When to use it: Use when the question asks for breakeven, maximum profit or maximum loss, or the profit at a spot price.

  1. Compute breakeven first: call K + P, put K − P.
  2. For a buyer: spot on the unfavourable side of the strike means loss equals premium. Past breakeven on the favourable side, profit = distance beyond breakeven.
  3. For a seller: flip the sign of the buyer's result.
  4. Between strike and breakeven, the buyer still loses a part of the premium, and the seller still gains a part.
  5. Eliminate options that show an unlimited loss for a buyer or a limited loss for a short call.

Common mistakes in Option Payoffs: Long and Short Calls and Puts

  • Ignoring the premium when computing profit.

    Students stop after computing intrinsic value.

    Fix: Always take the premium off for a buyer. Net profit = intrinsic value − premium.

  • Using strike + premium as the breakeven for a put.

    Students memorise the call formula only.

    Fix: Put breakeven is strike − premium, because a put gains when the price falls.

  • Saying a long put has unlimited profit.

    Confusing it with a long call.

    Fix: A price cannot fall below zero, so the maximum profit is strike − premium.

  • Treating the seller's maximum loss as the premium.

    Mixing up buyer and seller risk.

    Fix: The premium is the seller's maximum profit. A short call has unlimited loss. A short put has loss up to strike − premium.

  • Thinking the option is profitable as soon as spot crosses the strike.

    Forgetting that the premium must be recovered first.

    Fix: Profit begins only beyond the breakeven point.

  • Forgetting to multiply by lot size.

    Premiums are quoted per unit.

    Fix: Check whether the answer asked is per unit or per lot, and multiply accordingly.

Worked examples

Example 1

An investor buys one lot of 100 shares of a stock call option with strike ₹500 at a premium of ₹20 per share. At expiry the stock closes at ₹545. Find the breakeven and the net profit on the lot.

Show the solution
  1. Breakeven = 500 + 20 = ₹520.
  2. Intrinsic value = 545 − 500 = ₹45 per share.
  3. Net profit per share = 45 − 20 = ₹25.
  4. Profit on the lot = 25 × 100 = ₹2,500.

Answer: Breakeven is ₹520 and net profit is ₹2,500.

Example 2

A trader sells one lot of 50 units of a put option with strike ₹200 at a premium of ₹8. At expiry the underlying closes at ₹185. Find the trader's net result and the maximum possible loss per unit.

Show the solution
  1. Intrinsic value of the put = 200 − 185 = ₹15 per unit.
  2. Seller's result per unit = 8 − 15 = −₹7, a loss.
  3. Loss on the lot = 7 × 50 = ₹350.
  4. Maximum loss per unit occurs if the price falls to zero: 200 − 8 = ₹192.

Answer: Net loss is ₹350 on the lot. Maximum loss is ₹192 per unit.

Exam tips

  • Memorise the four shapes by their risk: buyers have limited loss, sellers have limited profit.
  • Compute breakeven before anything else. It answers many questions directly.
  • Read carefully whether the figure is per unit or for the lot.
  • Check if the question asks about the buyer or the writer. The numbers are the same with opposite signs.
  • Under negative marking in this exam, skip a payoff question only if you cannot identify the position.

Practice questions from Strategies using Equity Futures and Equity Options

Option Payoffs: Long and Short Calls and Puts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Option Payoffs: Long and Short Calls and Puts: frequently asked questions

What is the breakeven point of a put option?

It is the strike price minus the premium. At this expiry price the buyer's net profit is zero. Below it the buyer profits and the seller loses.

What is the maximum loss of a long call?

It is the premium paid. This happens if the spot price at expiry is at or below the strike price. The loss cannot be more than the premium.

Is the payoff of a short call unlimited?

The loss is unlimited because the price can rise without a limit. The profit is limited to the premium received.

Do the buyer and seller of an option have the same breakeven?

Yes. They are on opposite sides of the same contract. One person's profit equals the other's loss at every price.