Some exercises

Now that the basics of puts and calls are explained, it is time to get into exercises.

You buy a call on stock ABC, strike 50€ and expiration on March 18. You pay 1€ for this.

Look at the graph below

ABCGoingUP

How much is the option worth at March 18? What is you profit or loss?

As the stock trades at 60 on March 18,  the option is now worth 10€, You initially paid a premium for 1. The net gain is thus 9€. How so?

You have the right to buy for 50 and on the market you can sell for 60. That is thus 10€

It is important to nota that you need to take an action to realize this gain

1- sell you option on the market for 10€ and realize the gain of 9€ on the option

2- exercise your right to buy that stock at 50€. You now have a paper gain of 10€ on the stock and a real cost of 1€ (the option premium) (keep in mind the stock trading fee). To realize your gain, you need to sell the stock on the market

When you fail to do one of the above before the expiration day, you end up empty handed! After March 18, you loose you right to buy the stock!! Expiration date matters

Next one

You buy a put on stock ABC, strike 57€ and expiration on March 18. You pay 1,5€ for this.

Look at the graph below

ABCGoingUP

What is you profit or loss on March 18?

As the stock trades 60€ on March 18, it does not make sense to sell the stock at 57€ You can sell it on the market at 60€. in the end, you loose 1,5€, the premium you paid for the option.

A final one

You buy the March 18 put strike 50€ for 2€. what is your P&L on March 18?

ABCgoingdown

As you strike is 50€ and the stock trades a 45, the option is worth 5€. You paid 2 for this. You thus have a gain of 3€

Options lingo

Learn about puts.

Learn about calls