Call option
A call option gives its holder the right, but not the obligation, to buy an underlying asset at a fixed strike price on or before expiry, with payoff max(spot price − strike price, 0).
See it move
An investor buys a call option with a €50 strike, paying a €4 premium. If the share rises to €61, the payoff is €61 − €50 = €11 and net profit is €11 − €4 = €7 per share. If the price stays below €50 the option lapses and the loss is capped at the €4 premium. Breakeven is €54.
The formula
Variables
- Spot price at expiry (€)
- Strike (exercise) price (€)
The gross amount a call holder receives at expiry, before subtracting the premium originally paid for the option.
Check yourself
An investor buys a call option on a share with a strike price of €120, paying a premium of €9. At expiry the share is trading at €135. What is the investor's net profit per share?