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NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

Call and Put Option Payoffs Explained for NISM

Updated 11 October 2026 · Fact-checked

An option gives the buyer a right, not an obligation, to buy (call) or sell (put) an underlying at a fixed strike price. The buyer pays a premium. To solve payoff questions, compare the spot price with the strike, compute the gain or loss, then adjust for the premium and for buyer or writer.

Understand Options: Calls, Puts and Payoffs

An option is a contract. The buyer (holder) pays a premium to the writer (seller). In return, the buyer gets a right but no obligation. The writer has an obligation if the buyer exercises.

A call option gives the buyer the right to buy the underlying at the strike price. A put option gives the buyer the right to sell the underlying at the strike price. You buy a call when you expect the price to rise. You buy a put when you expect it to fall. Index options traded on Indian exchanges are cash settled. Exercise on the expiry date only is called European style. Exercise any time up to expiry is American style. Index options in India are European style.

Moneyness tells you where spot stands against strike. A call is in the money (ITM) when spot is above strike. A put is ITM when spot is below strike. Both are at the money (ATM) when spot equals strike. A call is out of the money (OTM) when spot is below strike. A put is OTM when spot is above strike.

The premium has two parts. Intrinsic value is the amount the option would be worth if exercised now. It is never negative. Time value is the rest of the premium. It is the price of the chance that the option becomes more valuable before expiry. ATM and OTM options have zero intrinsic value, so their whole premium is time value. Time value falls to zero at expiry.

The payoff is asymmetric. The buyer's loss is limited to the premium, and the profit can be large. The writer's gain is limited to the premium, and the loss can be large. One side's gain is exactly the other side's loss.

Key formulas to remember

Intrinsic value of a call
Max(Spot − Strike, 0)
Never negative. Zero for ATM and OTM calls.
Intrinsic value of a put
Max(Strike − Spot, 0)
Never negative. Zero for ATM and OTM puts.
Premium split
Premium = Intrinsic value + Time value
So time value = premium − intrinsic value.
Call buyer profit at expiry
Max(Spot − Strike, 0) − Premium
Maximum loss = premium. Breakeven = Strike + Premium.
Put buyer profit at expiry
Max(Strike − Spot, 0) − Premium
Maximum loss = premium. Breakeven = Strike − Premium.
Writer profit
Writer's profit = − Buyer's profit
Call writer: Premium − Max(Spot − Strike, 0). Put writer: Premium − Max(Strike − Spot, 0).

How to solve Options: Calls, Puts and Payoffs questions

Use the same sequence for any payoff, moneyness or value question.

  1. 1Identify the option type (call or put) and whether you are the buyer or the writer.
  2. 2Note the strike, the spot (or expiry price) and the premium.
  3. 3Check moneyness: call is ITM if spot > strike; put is ITM if spot < strike.
  4. 4Compute intrinsic value using Max(…, 0). Time value is premium minus intrinsic value.
  5. 5For profit at expiry, take the intrinsic value at expiry and subtract the premium paid (buyer).
  6. 6For the writer, reverse the sign: premium received minus the payout.
  7. 7Check limits: buyer's loss is capped at the premium; the writer's gain is capped at the premium.
  8. 8Multiply by lot size only if the question asks for the rupee amount per contract.

Quickest way: Four-line shortcut

When to use it: Use when the option asks for profit, loss or breakeven and time is short.

  1. Breakeven: call = strike + premium; put = strike − premium.
  2. Buyer: max loss = premium. Writer: max gain = premium.
  3. If expiry price is on the OTM side of strike, the buyer loses the full premium and the writer keeps it.
  4. Otherwise, profit = distance beyond strike − premium for the buyer. The writer gets the negative of this.

Common mistakes in Options: Calls, Puts and Payoffs

  • Treating a put as ITM when spot is above strike.

    Students apply the call rule to every option.

    Fix: Remember the put rule is the mirror image: a put is ITM when spot is below strike.

  • Showing negative intrinsic value for an OTM option.

    Students subtract spot from strike and keep the sign.

    Fix: Intrinsic value is Max(…, 0). OTM and ATM options have zero intrinsic value.

  • Forgetting the premium when computing profit.

    Students stop after finding the exercise gain.

    Fix: Net profit for the buyer is the exercise value minus the premium paid.

  • Saying the option buyer has an obligation.

    Confusion with futures, where both sides are obliged.

    Fix: Only the writer is obliged. The buyer holds the right and can let the option lapse.

  • Saying the writer's loss is limited.

    Students assume the buyer's limited loss applies to both sides.

    Fix: The writer's gain is limited to the premium. The loss is large (for a call writer, in principle unlimited).

  • Believing an ATM or OTM option has no value.

    Students confuse zero intrinsic value with zero premium.

    Fix: Such options still carry time value, so the premium is positive.

Worked examples

Example 1

A call option has a strike of ₹2,500 and a premium of ₹60. The spot price is ₹2,540. State its moneyness, intrinsic value and time value.

Show the solution
  1. Spot ₹2,540 is above strike ₹2,500, so the call is in the money.
  2. Intrinsic value = Max(2,540 − 2,500, 0) = ₹40.
  3. Time value = premium − intrinsic value = 60 − 40 = ₹20.

Answer: In the money; intrinsic value ₹40; time value ₹20.

Example 2

An investor buys a put option with a strike of ₹1,200 for a premium of ₹25. At expiry the underlying closes at ₹1,150. Find the buyer's profit and the writer's result per unit.

Show the solution
  1. The put is ITM because expiry price ₹1,150 is below strike ₹1,200.
  2. Payoff at expiry = Max(1,200 − 1,150, 0) = ₹50.
  3. Buyer's profit = 50 − 25 = ₹25 per unit.
  4. Writer's result = −₹25 per unit, since the writer received ₹25 premium and paid ₹50.

Answer: Buyer earns ₹25 per unit; writer loses ₹25 per unit.

Exam tips

  • Draw a quick sketch of the payoff in your head: the buyer's line is flat on the OTM side and slopes on the ITM side, shifted down by the premium.
  • Read carefully whether the question asks for payoff or net profit. Net profit includes the premium.
  • Watch for the words 'buyer' and 'writer'. Options often differ only in this word.
  • Negative marking applies in this paper, so skip only if you cannot remove two options. Eliminate options that show negative intrinsic value or a capped loss for a writer.

Practice questions from Derivatives

Options: Calls, Puts and Payoffs in other exams

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

Options: Calls, Puts and Payoffs: frequently asked questions

What is the difference between an option buyer and an option writer?

The buyer pays the premium and gets a right to exercise. The writer receives the premium and must perform if the buyer exercises. The buyer's loss is limited to the premium, while the writer's loss can be large.

How do I find intrinsic value and time value of an option?

Intrinsic value for a call is Max(spot − strike, 0), and for a put it is Max(strike − spot, 0). Time value is the premium minus the intrinsic value. At expiry, time value is zero.

When is an option in the money, at the money or out of the money?

A call is ITM when spot is above strike and OTM when spot is below it. A put is the opposite. Both are ATM when spot equals strike.

What is the breakeven price of an option?

For a call buyer it is strike plus premium. For a put buyer it is strike minus premium. At breakeven the buyer's net profit is zero.