Option Payoff Diagrams

Call Option Payoff

A call option is the right, but not the obligation, to buy an asset at a prespecified price on, or before, a prespecified date in the future.

This diagram shows the option’s payoff as the underlying price changes. Above the strike price of $100, the payoff of the option is $1 for every $1 appreciation of the underlying. If the stock falls below the strike price at expiration, the option expires worthless. Therefore, a call option has unlimited upside potential, but limited downside.

Put Option Payoff

A put option is the right, but not the obligation, to sell an asset at a prespecified price on, or before, a prespecified date in the future. The payoff diagram of a put option looks like a mirror image of the call option (along the Y axis). Below the strike price of $100, the put option earns $1 for every $1 depreciation of the underlying. If the stock is above the strike at expiration, the put expires worthless.

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