Short Call Payoff Diagram and Formula

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A short call position is the opposite of a long call option payoff diagram explanation option position the other side of the trade. You sell a call call option payoff diagram explanation and receive cash in the beginning. Then you either buy the option back or wait until expiration. The payoff diagram of a short call position is the inverse of long call diagram, as you are taking the other side of the trade. Basically, you multiply the profit or loss by For detailed explanation of the logic behind individual sections of the graph, see long call option payoff.

The formulas are the same as those for long call option strategy, only the profit or loss is multiplied by -1, because you are taking the other side of the trade. The formula for calculating short call break-even point is exactly the same as the one for long call break-even point:.

For example, if you sell a 45 strike call option for 2. The trade is profitable if underlying price ends up below this point.

If it gets above, the trade is losing money and the loss increases proportionally with underlying price. 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All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong.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 call option payoff diagram explanation, investment or trading advice is given at any time. Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. Short Call Payoff Diagram and Formula. The trade is profitable call option payoff diagram explanation you buy the option back for a lower price than what you sold it for, or if the option expires worthless or with intrinsic value lower than what call option payoff diagram explanation sold the option for.

Short Call Payoff Diagram The payoff diagram of a short call position is the inverse of long call diagram, as you are taking the other side of the trade. Short Call Payoff Formulas The formulas are the same as those for long call option strategy, only the profit or loss is multiplied by -1, because you are taking the other side of the trade. There are again two components of the total profit or loss: The initial option price The value of the option at expiration Only the signs are opposite compared to long call payoff.

It is also a short volatility strategy, as the value of a call option declines when volatility decreases, which means your short call position becomes more profitable. You want the underlying price to end up below the strike price.

Short call strategy has limited upside, equal to the cash you get when call option payoff diagram explanation the call option in the beginning. This is the maximum you can gain from the trade. It has unlimited risk, because your total loss from the trade rises proportionally with the underlying price, which theoretically can go up infinitely.

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Here you can see the same for put option payoff. And here the same for short call position the inverse of long call. Buying a call option is the simplest of option trades. A call option gives you the right, but not obligation, to buy the underlying security at the given strike price. Below the strike, the payoff chart is constant and negative the trade is a loss.

For example, if underlying price is Same as scenario 1 in fact. Finally, this is the scenario which a call option holder is hoping for. Because the option gives you the right to buy the underlying at strike price If you bought the option at 2.

You can also see this in the payoff diagram where underlying price X-axis is Initial cash flow is constant — the same under all scenarios.

It is a product of three things:. Of course, with a long call position the initial cash flow is negative, as you are buying the options in the beginning. The second component of a call option payoff, cash flow at expiration, varies depending on underlying price. That said, it is actually quite simple and you can construct it from the scenarios discussed above. If underlying price is below than or equal to strike price, the cash flow at expiration is always zero, as you just let the option expire and do nothing.

If underlying price is above the strike price, you exercise the option and you can immediately sell it on the market at the current underlying price. Therefore the cash flow is the difference between underlying price and strike price, times number of shares.

Putting all the scenarios together, we can say that the cash flow at expiration is equal to the greater of:. It is the same formula. The screenshot below illustrates call option payoff calculation in Excel. Besides the MAX function, which is very simple, it is all basic arithmetics. One other thing you may want to calculate is the exact underlying price where your long call position starts to be profitable.

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. 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.