Options Basics

An option gives its buyer the RIGHT (not obligation) to buy (a call) or sell (a put) a stock at a fixed strike price, by some expiration date — in exchange for paying an upfront premium to the seller.

def call_payoff(spot, strike):
    return max(spot - strike, 0)

print(call_payoff(110, 100))   # 10 -- stock is 10 above strike, exercise for a 10 profit
print(call_payoff(90, 100))     # 0 -- stock is below strike, the option expires worthless

A call is only exercised if the stock ends up ABOVE the strike (why pay 100 for something worth 90 on the open market?) — below the strike, the buyer just lets it expire, losing only the premium already paid.

Payoff alone isn't profit — the buyer paid a premium upfront, which must be subtracted:

def net_option_profit(spot, strike, premium, option_type):
    if option_type == "call":
        payoff = max(spot - strike, 0)
    else:
        payoff = max(strike - spot, 0)
    return payoff - premium

This is why options are asymmetric bets: the buyer's downside is capped (lose at most the premium — the payoff can never go negative), but their upside is uncapped for a call (a stock can rise indefinitely). The SELLER of the option has the exact opposite risk profile: capped upside (collect at most the premium), uncapped downside — which is why option selling is generally considered the riskier side of the trade.