Option Fundamentals   • 11
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GREEN
RED
As soon as the “Buy” button is pushed, the investor gains expo-
sure to the upside potential of the stock—this is the shaded region la-
beled “green” in the figure. However, at the same time, the investor 
also must accept exposure to downside risk—this is the shaded region 
labeled “red. ”
Anyone who has invested in stocks has a visceral understanding of 
stock directionality. We all know the joy of being right as our investment 
soars into the green and we’ve all felt the sting as an investment we own 
falls into the red. We also know that to the extent that we want to gain 
exposure to the upside potential of a stock, we must necessarily simultane-
ously accept its downside risk.
Options, like stocks, are directional instruments that come in two 
types. These two types can be defined in directional terms:
Call option  A security that allows an investor exposure to a stock’s 
upside potential (remember, “Call up”)
Put option  A security that allows an investor exposure to a stock’s 
downside potential (remember, “Put down”)
The fact that options split the directionality of stocks in half—up and 
down—is a great advantage to an investor that we will investigate more in 
a moment. 
Right now, let’s take a look at each of these directional instruments—
call options and put options—one by one.