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. An investor can take a long or a short position in a call option.

Long Call

Consider a call option with a strike price of $105 and a premium of $3.

This diagram shows the option’s payoff as the underlying price changes for a long call position. If the stock falls below the strike price at expiration, the option expires worthless. The option buyer loses $3 and option seller gains $3. As the stock’s strike price starts increasing above $105, the payoff from the option starts increasing for the buyer. The option will breakeven when the stock price is equal to the strike price plus the option premium ($105 + $3). A call option has unlimited upside potential, but limited downside for the option buyer.

The profit/loss diagram for a long call position is summarized below:

  • Maximum profit is unlimited as theoretically the stock price can keep increasing.
  • Maximum loss is equal to the option premium paid.
  • Breakeven point occurs when the Stock Price = Strike Price + Premium Paid
  • The call option holder will exercise the option when the stock price exceeds the strike price.

Short Call

The following diagram shows the call option payoff from the seller’s perspective.

 

  • The maximum profit is limited to the option premium received.
  • Maximum loss is unlimited. The loss increases as the stock price increases.
  • Breakeven point occurs when the Stock Price = Strike Price + Premium Received

Data Science in Finance: 9-Book Bundle

Data Science in Finance Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

What's Included:

  • Getting Started with R
  • R Programming for Data Science
  • Data Visualization with R
  • Financial Time Series Analysis with R
  • Quantitative Trading Strategies with R
  • Derivatives with R
  • Credit Risk Modelling With R
  • Python for Data Science
  • Machine Learning in Finance using Python

Each book includes PDFs, explanations, instructions, data files, and R code for all examples.

Get the Bundle for $39 (Regular $57)
JOIN 30,000 DATA PROFESSIONALS

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Data Science in Finance: 9-Book Bundle

Data Science in Finance Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

What's Included:

  • Getting Started with R
  • R Programming for Data Science
  • Data Visualization with R
  • Financial Time Series Analysis with R
  • Quantitative Trading Strategies with R
  • Derivatives with R
  • Credit Risk Modelling With R
  • Python for Data Science
  • Machine Learning in Finance using Python

Each book comes with PDFs, detailed explanations, step-by-step instructions, data files, and complete downloadable R code for all examples.