Profit diagram for the buyer of a call option


Call Option Payoff Diagram Buying a call option is the simplest of option trades. It is a product of three things: Here you can see the same for put option payoff. This page was last edited on 30 Marchat

You can also see this in the payoff diagram where underlying price X-axis is Views Read Edit View history. From Wikipedia, the free encyclopedia.

The second component of a call option payoff, cash flow at expiration, varies depending on underlying price. Upper Saddle River, New Jersey Option values vary with the value of the underlying instrument over time. If you don't agree with any part of this Agreement, please leave the website now.

This article needs additional citations for verification. The price of the call contract must reflect the "likelihood" or chance of the call finishing in-the-money. October Learn how and when to remove this template message. Macroption is not liable for any damages resulting from using the content.

Adjustment to Call Option: A call option gives you the right, but not obligation, to buy the underlying security at the given strike price. Underlying price is higher than strike price Finally, this is the scenario which a call option holder is hoping for. Articles needing additional references from October All articles needing additional references. Putting all the scenarios together, we can say that the cash flow at expiration is equal to the greater of:.

The term "call" comes from the fact that the owner has the right to "call the stock away" from the seller. It is the sum of strike price and initial option price. A call optionoften simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. Adjustment to Call Option:

Call Option Scenarios and Profit or Loss Three things can generally happen when you are long a call option. By using this site, you agree to the Terms of Use and Privacy Policy. Of course, with a long call position the initial cash flow is negative, as you are buying the options in the beginning.

If you bought the option at 2. The position turns profitable at break-even underlying price equal to the sum of strike price and initial option price. Articles needing additional references from October All articles needing additional references.

Strike price 45 in the example above Initial price at which you have bought the option 2. Adjustment to Call Option: Call Option Break-Even Point Calculation One other thing you may want to calculate is the exact underlying price where your long call position starts to be profitable.