# Call and put options formula

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Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time. Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. We will look at: Call Option Payoff Diagram Buying a call option is the simplest of option trades. The key variables are: Strike price 45 in the example above Initial price at which you have bought the option 2.

Call Option Scenarios and Profit or Loss Three things can generally happen when you are long a call option. Underlying price is higher than strike price Finally, this is the scenario which a call option holder is hoping for.

Call Option Payoff Formula The total profit or loss from a long call trade is always a sum of two things: Initial cash flow Cash flow at expiration Initial cash flow Initial cash flow is constant — the same under all scenarios. It is a product of three things: Cash flow at expiration The second component of a call option payoff, cash flow at expiration, varies depending on underlying price. 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.

It is very simple. It is the sum of strike price and initial option price. Long Call Option Payoff Summary A long call option position is bullish, with limited risk and unlimited upside. Maximum possible loss is equal to initial cost of the option and applies for underlying price below than or equal to the strike price. With underlying price above the strike, the payoff rises in proportion with underlying price. The position turns profitable at break-even underlying price equal to the sum of strike price and initial option price.

Besides the strike price, another important point on the payoff diagram is the break-even point, which is the underlying price where the position turns from losing to profitable or vice-versa.

Calculating the exact break-even price is very useful when evaluating potential option trades. The formula for put option break-even point is actually very simple:. If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong. Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time.

Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. Put Option Payoff Diagram and Formula. This page explains put option payoff. We will look at: Long Put Option Position is Bearish While a call option gives you the right to buy the underlying security, a put option represents the right but not obligation to sell the underlying at the given strike price.

Put Option Payoff Diagram You can see the payoff graph below. Put Option Scenarios and Profit or Loss 1. What you can get when exercising the option What you have paid for the option in the beginning The first component is equal to the difference between strike price and underlying price.

Taking all scenarios into consideration, a long put option cash flow at expiration is therefore the higher of: Therefore the formula for long put option payoff is: Put Option Break-Even Point Calculation Besides the strike price, another important point on the payoff diagram is the break-even point, which is the underlying price where the position turns from losing to profitable or vice-versa.

The formula for put option break-even point is actually very simple: Long Put Option Payoff Summary A long put option position is bearish, with limited risk and limited but usually very high potential profit. Maximum possible loss is equal to initial cost of the option and applies for underlying price higher than or equal to the strike price.

With underlying price below the strike, the payoff rises in proportion with underlying price. The position turns profitable at break-even underlying price equal to strike price minus initial option price.