Call Option Payoff: What is it? How can this benefit you?

Call option payoff means the profit or loss a trader makes from buying or selling an option. If you want to know all about this key aspect of options trading, then you are on the right platform. In this article, we are going to explain the call option payoff in the easiest words. Let’s begin right away. 

Call option payoff

Call option payoff refers to the profit or loss a trader makes from trading options contracts. There are two key variables that decide payoff – strike price and premium. Furthermore, there are two scenarios of call option payoff. 

1. Call option payoff for call option buyers

As you know, a call option is a right and not an obligation to buy stocks. Therefore, if the spot price of the underlying security increases, you make a profit and the profit potential is unlimited. Whereas, the potential loss is limited because you only lose the premium paid if the spot price declines below the strike price. This is because you don’t have to exercise the option contract as you don’t have the obligation. 

So, what are the payoffs and breakeven? Let’s try to understand it through an example. Suppose that you purchase a call option for a premium of $3 with an underlying stock of a company. The strike price is $60. Your breakeven is $63 because it will cover both strike price plus the premium paid. However, if the spot price rises above $63, you make a profit. Suppose that the spot price rises to $65 at the expiration date. Now, your call option payoff will be $2. Moreover, it is also important to note that the profit potential is unlimited in this case because no one knows how much the price of the stocks can rise.

On the other hand, if the spot price declines below $60, you don’t have to exercise the option contract and let it expire. This is because you have the right but not the obligation to exercise the option contract. Thus, the total loss potential is limited because you only lose the premium paid. You can calculate your profit using the following equations.

Payoff = Spot price – strike price

Profit = Payoff – premium paid

2. Payoff for call option sellers

The call option payoff for call option sellers is also similar to the payoff for call option buyers. Suppose that you sell options contracts of stocks of a company with the same strike price and expiration date. Now, you can only make a profit when the price of the underlying security plummets. Your losses can be unlimited if your position is naked. However, you can limit your losses with a covered call. If you go naked, you have to suffer huge losses when the spot price rises significantly and the buyer of the call option exercises his option. You can use the following equations to calculate the payoff.

Payoff = Spot price – strike price

Profit = Payoff – premium paid

Option payoff charts

Option payoff charts are among the top tools to analyze your option payoff. You can easily analyze the price movement of the underlying security. With the help of real-time ticks and other advantages, you can choose your strategy with ease. Simply put, you can use these visually stunning charts to analyze the results of your trading as well as the outcome of your strategy. 

Options payoff calculator

You can also use a calculator to calculate the payoff of your trading. There are multiple online options at your disposal that save a lot of your time and energy. The biggest advantage of these tools is that they calculate unique basic details like premium, quantity, stock price, option price, strike price, etc. Additionally, you can also get statistics like the history of orders. In short, you can use these tools not only to save time but also to take your trading to the next level. 

The wrap-up

Call option payoff refers to the profit or loss traders make when buying or selling call options. This is an important aspect of options trading because you need to know how much you earned or lose when options expire. There are almost similar methods for payoff calculations for both call option buyers and call option sellers. Moreover, you can also use modern digital tools like payoff graphs and payoff calculators for efficiency and ease. The key is to analyze your output and it doesn’t matter much whether you go manually or use modern tools.