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.

Lesson Resources

This bundle contains three spreadsheets to help with your options trading needs in excel.
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