What are call and put options?
What the interviewer is testing
Basic option payoffs and who has what obligation.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
A call gives the holder the right, but not the obligation, to buy an asset at a fixed strike price by (or on) a set date; a put gives the right to sell. The buyer pays a premium; the seller (writer) receives it and takes on the obligation. A call buyer profits if the price rises above the strike plus the premium; a put buyer if it falls below the strike minus the premium.
The full answer
| Position | View | Max gain | Max loss |
|---|---|---|---|
| Long call | Bullish | Unlimited | Premium |
| Long put | Bearish | Strike − premium | Premium |
| Short call | Neutral to bearish | Premium | Unlimited |
| Short put | Neutral to bullish | Premium | Strike − premium |
Example
Stock at €50, 3-month call with a €55 strike, premium €2. At expiry:
- Stock at €62: payoff 7, profit 5.
- Stock at €54: worthless, loss 2.
Moneyness
- In the money: a call with the strike below the price; a put with the strike above.
- At the money: strike ≈ price.
- Out of the money: the rest.
Value = intrinsic value (what it would pay now) + time value.
Mistakes to avoid
Saying an option obliges the buyer to transact.
Follow-ups they may ask
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