Payoff diagram short call option
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. Short Call Payoff Diagram and Formula.
The trade is profitable if 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 you 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 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 All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong.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. Complex options positions can be understood by combining payoff diagrams. Next, we will combine payoff diagrams to understand the put-call parity. Imagine an options portfolio with a long call and a short put position, both with the same exercise price.
This will have the following payoff:. Compare the resulting payoff — the diagram on the right hand side. This looks just like the payoff for the stock, except that the line is a bit lower.
And it is lower by exactly the amount of the exercise price, present valued to today. By combining a long call with a short put, we end up with a linear payoff, just like for the stock. This linear payoff, combined with a bank deposit, has a payoff identical to a stock:. This is the put-call parity. Notice the right hand side of this equation. The exercise price is a constant, and so is the spot price.
So at any point in time, RHS is fixed. Therefore if call prices rise, put prices would rise need to rise too in order to maintain the parity.