Calls and Puts
A call gives you the right to buy; a put gives you the right to sell. Both can be bought (long) or sold (short), giving four basic positions with fundamentally different risk-reward profiles. Understanding these four is the foundation for every options strategy.
Interactive Payoff Diagram
Toggle between call and put, long and short. Adjust the strike and premium to see how the payoff changes at any spot price at expiry.
? Animated Payoff Builder
Watch the payoff diagram animate as we sweep the spot price from low to high. This shows the convexity of a long call vs the concave exposure of a short put. Press play to animate.
Moneyness: What Each Zone Means
Covered Call vs Cash-Secured Put
Two of the most common income strategies. Both sell premium, but they have different collateral requirements and market views.
You own ETH and sell a call against it. You collect premium and keep ETH if price stays below strike.
Collateral: Your ETH holdings
Market view: Neutral to moderately bullish
Max profit: Strike ? Spot + Premium
Max loss: ETH price ? Premium (if ETH -> 0)
- You expect ETH to be range-bound or rise modestly
- IV is high (you sell expensive options)
- You want income on ETH you plan to hold anyway
You lock USDC as collateral and sell a put. If assigned, you buy ETH at the strike. You collect premium regardless.
Collateral: USDC equal to strike contracts
Market view: Want to buy ETH at a discount
Max profit: Premium received
Max loss: Strike ? Premium (if ETH -> 0)
- You want to buy ETH lower than current spot
- You expect a dip but want to get paid waiting
- You have idle stablecoins earning low APY
Covered Call Builder
Synthetic Call Replication via Perps
A long call has convex payoff - capped downside, unlimited upside. Can we replicate this using a perp (linear payoff)? Long perp + Long put = Synthetic call. The put's gains offset ETH crashes, while the perp captures all the upside.
Linear: $1 move = $1 PnL
Capped downside at K
Convex: capped loss, unlimited gain
? Long vs Short: The Fundamental Asymmetry
Calls: the right to buy
A call option gives the holder the right (not the obligation) to buy the underlying asset at the strike price on or before expiry. You pay a premium upfront for this right. The payoff at expiry is max(spot - strike, 0) for a long call - if ETH is above the strike, you exercise and buy at the discount; if below, you let it expire and only lose the premium.
The key insight is convexity: a long call's loss is capped at the premium you paid, but your gain is theoretically unlimited if ETH goes to $10,000. A linear instrument (like a perp) has the same $1 gain for $1 of price move in either direction - the call's convexity means your upside exceeds your downside by the ratio of potential gain to guaranteed loss. This asymmetry is why calls are used for speculative bets, portfolio protection, and as building blocks for complex strategies.
For a call to be profitable at expiry, spot must be above strike + premium (the breakeven). If you buy a $2,000 call for $100, you need ETH above $2,100 to profit. The further above strike, the more profit; the further below strike, the more you lose (up to the premium).
Puts: the right to sell
A put option gives the holder the right to sell the underlying at the strike price. If you think ETH is going to crash, a put gives you downside protection - or speculation on the decline. The payoff at expiry is max(strike - spot, 0) for a long put. If ETH crashes to $1,000 and your put strike is $1,800, you sell at $1,800 and pocket $800 per ETH above market.
Puts are used for three things: speculation (betting on a decline), hedging (protecting a long position or an ETH-denominated portfolio), and income (selling cash-secured puts to earn premium while waiting to buy at a discount). The last use is underappreciated - selling a $1,800 put on ETH at $2,000 means you're getting paid to wait for ETH to drop to $1,800, and your effective cost if assigned is $1,720 after the premium you collected.
Short calls and puts: the seller's view
When you sell (short) an option, you collect premium upfront and take on the obligation. A short call at $2,200 means if ETH goes to $3,000, you're forced to sell at $2,200 - you've missed $800 of upside per ETH you were short. Your max profit is the premium; your max loss is unlimited (for calls) or strike - premium (for puts). Short sellers are the backbone of DeFi options liquidity - they provide the capital that lets buyers express views.
The short seller's edge is theta: time decay erodes the option's value daily even if spot doesn't move. A short call at $2,200 with 30 DTE might be worth $100 today; in 30 days at the same spot price, it's worth $0 and you keep the full premium. But if ETH rallies 20%, the short call is now deep ITM and you're facing massive losses. The seller needs to be right about direction AND about the timing - they need price to stay away from the strike for the full duration.
Intrinsic vs time value
Every option price breaks into two components: intrinsic value (what you'd get if exercised right now) and time value (the remaining premium for the chance of further moves). A $2,000 strike call when ETH is at $2,500 has $500 intrinsic value (you'd gain $500 by exercising). If the call costs $650, the remaining $150 is time value - the market is pricing in the chance ETH goes even higher before expiry.
OTM options have zero intrinsic value - their entire price is time value. An ETH call at $3,000 strike when spot is $2,000 is purely time value. As expiry approaches, time value decays to zero. This is why options near expiry behave differently - gamma spikes as the option approaches the strike from either side, making delta changes extremely rapid.
Frequently asked questions
- What determines if a call or put is ITM, ATM, or OTM?
- For a call option, In-the-Money (ITM) means spot > strike (you can buy the asset cheaper than market by exercising). At-the-Money (ATM) means spot ? strike (the most liquid strikes, typically chosen as the reference for delta). Out-of-the-Money (OTM) means spot < strike (you wouldn't exercise, your option is purely time value). For puts, the relationship is reversed: put is ITM when spot < strike, OTM when spot > strike. ATM options have the highest vega and gamma - they're most sensitive to changes in vol and spot.
- How does the premium relate to intrinsic and time value?
- An option's price = intrinsic value + time value. Intrinsic value is what you'd get if you exercised right now: max(S - K, 0) for calls, max(K - S, 0) for puts. A call at $2,500 strike with ETH at $3,000 has $500 intrinsic value. The remaining premium is time value - the value of the opportunity to benefit from further price moves before expiry. OTM options have zero intrinsic value - all their premium is pure time value that decays to zero at expiry.
- Can you replicate a call option using a perpetual?
- A long call has convex payoff - your loss is capped at the premium but your gain is unlimited. A long perp is linear - $1 move in ETH = $1 PnL. You can approximate a call's convexity by buying a perp and a put together: the put caps your downside, the perp captures the upside. This combination replicates the call's payoff profile (called a synthetic call). Alternatively, you can use a perp + short a very OTM call to create a covered-call-like payoff - but the synthetic never has identical convexity to a real call due to the gamma difference.
- What is a covered call and when does it make sense in DeFi?
- A covered call means you own the underlying ETH and sell a call against it. If ETH stays below the strike, you keep the premium. If ETH rises above the strike, your ETH gets called away at the strike price - you've missed the upside above that level but were paid to accept that ceiling. In DeFi, you deposit ETH into Lyra's LP pools and the AMM sells calls against your collateral; you earn the bid-ask spread plus the short call premium. The strategy makes sense when you expect ETH to stay flat or rise modestly - you earn income without taking directional risk.
- When would I sell a cash-secured put instead of just buying ETH?
- A cash-secured put makes sense when you want to buy ETH at a discount. If ETH is at $2,000 and you sell a $1,800 put for $80, you're getting paid $80 to agree to buy ETH at $1,800. If ETH drops to $1,800 or below, you're assigned and buy at $1,800 - but your net cost was $1,720 (strike minus premium). If ETH stays above $1,800, you keep the $80 and can try again. It's a way to earn premium while waiting for a better entry. The risk is that ETH crashes (you're forced to buy at above-market price) or rallies (you miss the upside).
- What's the difference between European and American option exercise?
- European options can only be exercised at expiry. American options can be exercised at any time before expiry. Most on-chain options protocols (Lyra, Dopex) use European-style because early exercise adds complexity - the AMM would need to account for the optionality value of early exercise when pricing. American options are more common in equities where early exercise (for dividends) has real value. Hegic offers American-style options, which is why its put seller model can handle early exercise scenarios.
- How do breakeven points work for calls vs puts?
- For a long call: breakeven = strike + premium paid. If you buy a $2,000 call for $100, you profit when ETH > $2,100 (anything above that covers your premium and starts making money). For a long put: breakeven = strike - premium paid. If you buy a $2,000 put for $100, you profit when ETH < $1,900. For short options, the breakeven is the same - but the short position profits when the market doesn't reach that level.