Options Basics

Q: The maximum loss for a long call buyer is:

The premium paid. An option buyer can lose at most the premium paid. If the option expires out of the money the buyer simply lets it lapse. This is the defining asymmetry between long and short option positions.

Q: On the ASX, a single equity option contract typically covers:

100 shares. ASX equity options have a standard contract size of 100 underlying shares. A premium quoted at A2 per share therefore costs A200 per contract, before brokerage.

An option is a contract that gives the buyer the right but not the obligation to buy or sell an underlying asset at a fixed strike price $K$ on or before the expiry date $T$ . The buyer pays a premium to the writer (seller), who takes on the matching obligation. Calls grant the right to buy, puts grant the right to sell. Globally, exchange-traded options volume reached record levels in 2024 (FIA Annual Volume Survey), with the ASX listing options on around 70 leading Australian companies plus index options on the S&P/ASX 200.

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What Is an Option? Calls, Puts, and the Premium

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Payoff at expiry

Pick one position and watch its expiry profile across the underlying price S_T. The dashed line is gross payoff; the solid line is profit after premium.

Try this:

Breakeven 55.00Max profit ∞Max loss −A$5Moneyness ITM

Strike KK = 50

Premiumprem = 5

Current spotS = 52

PREMIUM AT SPOT = 52

Intrinsic valueA$2

Time valueA$3

PremiumA$5

Why it matters

An option is conditional insurance that you actively choose whether to use. You pay a fixed premium today for a future right. If the right is worth using at expiry, you exercise. If it is worthless, you walk away and lose only the premium. The buyer's maximum loss is capped at the premium, while the writer collects that premium upfront in exchange for accepting a one-sided risk. This asymmetry is what makes options different from futures, where both sides face symmetric obligations.

Before you read on — recall

The maximum loss for a long call buyer is:

Formulas

Call payoff at expiry

\text{Payoff}_{\text{call}} = \max(S_T - K, 0)

Holder exercises when

S_T > K

, buying at

K

and selling at the higher market price.

Put payoff at expiry

\text{Payoff}_{\text{put}} = \max(K - S_T, 0)

Holder exercises when

S_T < K

, selling at

K

above the lower market price.

Worked examples

Scenario

You buy an ASX call option on BHP with strike $K =$ $45, premium $C =$ $2, expiring in 3 months. Contract size on ASX equity options is 100 shares.

Solution

Total cost paid is $C \times 100 =$ $200. If BHP rises to $S_T =$ $50 at expiry, payoff per share $= \max(50 - 45, 0) =$ $5, and profit per share $= 5 - 2 =$ $3, or $300 total. If BHP stays below $45, the call expires worthless. The $200 premium is the total loss.

Scenario

You write (sell) the same call as above, collecting $200 in premium.

Solution

Your maximum profit is the $200 premium, achieved if BHP closes at or below $45. If BHP rises to $50, you owe $5 per share, so net result $= 2 - 5 = -$ $3 per share. Your loss is uncapped because there is no ceiling on how high $S_T$ can climb. This asymmetry between buyer and writer drives margin requirements for option writers on ASX Clear.

Common mistakes

✗Options are always risky. For the buyer, maximum loss equals the premium paid. It is the writer of an uncovered call who faces unlimited risk, not the option buyer.
✗Buying an option means you must exercise it. You can sell the option in the market at any time before expiry. Most listed options that finish in the money are closed out by trading, not by physical exercise.
✗Options only exist on stocks. ASX lists options on single stocks, the S&P/ASX 200 index (XJO), and exchange-traded funds. Globally, options also trade on currencies, interest rates, commodities, and futures.

Revision bullets

•Right not obligation for the buyer of an option
•Call is right to buy. Put is right to sell
•Buyer pays premium to the writer upfront
•Writer accepts obligation if buyer exercises
•Buyer's max loss is the premium. Writer's loss can be unlimited
•ASX equity contract size is 100 shares per option

Quick check

The maximum loss for a long call buyer is:

On the ASX, a single equity option contract typically covers:

Connected topics

Derivatives Hedge / Spec Call Put Premium Am. vs Eu.

More in Options

Moneyness Intrinsic Time Value Break-even Long Call Short Call Long Put Short Put

In learning paths

Options Path

Sources

Hull (2022), Ch. 10
Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
Chapter 10 introduces option mechanics, contract specifications, and the basic call and put payoff functions.
ASX Options Knowledge Hub
Australian Securities Exchange. Types of Options. ASX Investor Education, accessed 2026.
Primary local reference for ASX-listed equity and index options, including contract size of 100 shares and the distinction between American-style equity options and European-style index options.
Cboe Options Institute Glossary
Cboe Global Markets. Options Trading Glossary. Cboe Options Institute, accessed 2026.
Authoritative US definitions of call, put, premium, strike, and exercise mechanics for listed options.
FIA 2024 ETD Volume Report
Futures Industry Association. Annual Volume Survey 2024: Global Futures and Options Volume. FIA, January 2025.
Confirms the record 12.16 billion equity option contracts traded globally in 2024, establishing options as the largest exchange-traded derivatives category by volume.

How to cite this page

Dr. Phil's Quant Lab. (2026). Options Basics. Derivatives Atlas. https://phucnguyenvan.com/concept/options-basics