Basics of equity option payoffs

S

SoyUnGanador

Profits (or losses) to option purchaser - amount by which option price upon exercise exceeds (in the case of a call) or is less than (in the case of a put) the chosen strike price, less the premium paid.

To option seller: If stock price does not exceed (in the case of a call) or is not less than (in the case of a put) the strike price, profit is the premium. If stock price does exceed (in the case of a call) or is less than (in the case of a put) the strike price, profit (or loss) is the amount by with the premium received is greater than (or less than) the difference between the stock price upon exercise and the premium received.

That pretty much sums it up, correct? All prices are upon exercise, which is likely to be close to expiration. Sorry for noob question!

Thanks!
 
SoyUnGanador said:
Profits (or losses) to option purchaser - amount by which option price upon exercise exceeds (in the case of a call) or is less than (in the case of a put) the chosen strike price, less the premium paid.

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So... many... words...

First, get absolutely clear on the terminal P&L for a given strike, premium, and price at expiration. [1] Then - for early exercise, which you seem to be interested in for some reason (and which happens very rarely) - add in understanding of remaining extrinsic value (which the owner of the option is giving to you, free and clear, by exercising early.)

See? Simple.

[1] If you need practice with that - and it seems like you do - try this. Stick with the single options until you get it.

https://linuxgazette.net/options/payoff.html
 
SoyUnGanador said:
Not just early exercise, any exercise - which will generally be close the the last possible moment when it can be exercised.
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Everything I've said still applies. If it's exercised early, you get free tendies. If it's exercised after expiration, the terminal payoff values apply. Simple.
 
"Free tendies" - by this you mean the option holder just pissed away some potential to profit more by exercising early (and that benefits the option writer), correct?

"If it's exercised after expiration, the terminal payoff values apply. Simple." Well, technically it cannot be exercised after expiration, can it?
 
SoyUnGanador said:
"Free tendies" - by this you mean the option holder just pissed away some potential to profit more by exercising early (and that benefits the option writer), correct?
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Correct. "some potential", in this case, being the extrinsic value of the option.

"If it's exercised after expiration, the terminal payoff values apply. Simple." Well, technically it cannot be exercised after expiration, can it?
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The way that most people use the term - i.e., the cash market close of the listed expiration day - yes, it can (and usually is.) The actual expiration - whatever it happens to be for a given exchange, e.g., 11:59pm of that (or the next) day - no.

You had all this run down for you in another recent thread, as I recall.
 
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