A put can place a floor under an equity holding; a call spread can cap both the cost and the upside of a position. This lesson builds these asymmetric payoffs from calls and puts, then prices a one-period option by replication. The options-pricing Programme develops multi-step trees and later pricing methods.
Learning objectives. By the end of this note you should be able to:
- write European call/put payoffs and distinguish European from American exercise;
- define intrinsic value, time value and moneyness;
- assemble bull/bear spreads and simple combinations from calls and puts;
- derive the one-period binomial price via replication and state the risk-neutral formula;
- know where to go next in the options-pricing programme.
In this lesson
- Option mechanics
- Put–call parity (model-free anchor)
- Payoff engineering: spreads and combinations
- One-period binomial: first pricing idea
- A spread caps both payoff and profit
- Two states determine the replicating hedge
Before you start
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