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# Call payoff diagram

A call payoff diagram is a way of visualizing the value of a call option at expiration based on the value of the underlying stock. Learn how to create and interpret call payoff diagrams in this video. Created by Sal Khan.

## Want to join the conversation?

• What is the difference between the call and put options?
• Call: an option to buy stock at strike price within a month anytime the stock price goes above the strike price.
Put: an option to sell stock at strike price within a month anytime the stock price goes below the strike price.
• Surely one would not exercise a call option before expiration, if it was 'in the money', as the time value of the call option would probably be greater than the difference between Stock Price minus Strike Price minus Option Price. So would it be better to sell the option? rather than exercising it?
• I think nicole has missed the point of your question though: yes, you can sell the option itself if you think it is at its peak instead of waiting until expiry. This will usually make you more money than exercising the option before expiry (in which case you waste the time-value inherent in the option price), or waiting to exercise at expiry (in which case it may go down).

So yes, it is generally better to sell the option than to exercise it before expiry.
• Shouldn't the call option be worthless below 60 ? I mean, If i paid \$10 to buy the stock at \$50 upto a month later, If i bought it at \$50, then i actually paid \$10 + \$50 = \$60. So should the call option give profit above \$60 ? Am i missing something ?
• If a call option allows you to buy something for \$50 that is selling for \$60, then it has a value of \$10 (on the strike date), regardless of what you might have originally paid for the call option.
• A general question about Call Option.
Doesn't it make more sense for everyone to place a call option at the lowest price possible?
For example. Let's say I a company trading at \$10/share. I placed a call option with \$0.01 strike price; so unless the company goes bankrupt, I will guaranteed to make a profit? This would sound too good to be true.
Is there a limit where you call the strike price at (the current share price or higher?)
• How much would someone charge you for an option with a strike price of \$0.01 when the stock is already at \$10? They will charge you at least \$9.99, right? And actually they will charge you more than that since the stock could go up. Options are always priced to take into account two components of value: the intrinsic value and the time value. The intrinsic value is how much the option is worth if you exercise it right now. The time value reflects the extra value of being able to wait to exercise.
• So how come in the P/L graph we are at a loss of \$10 when the strike price is below \$50?
• Because you paid \$10 for the option. For example, suppose I pay \$2 for an option to buy a stock at \$25. I'm out \$2 if I don't use that option. I won't use that option at all until the price of the stock goes above \$25. So lets say the price of the stock is \$26. I use my option, but the stock for \$25, then immediately sell it for \$26. My profit is:
Profit=Price I sold stock for - Price of the stock that I paid - Price of the option
=\$26 - \$25 - \$2
=-\$1
• Shouldn't we consider the time value of money in the P/L diagram? That \$10 we have invested could have been earning interest up until the expiration. So our maximum loss should be slightly more than \$10. Is my reasoning correct?
(1 vote)
• Yes, but normally options are fairly short term so this doesn't make a big difference, especially when it comes to just understanding the concept.
• i don't get it, is it \$10 per stock u pay? i paid \$10 to buy the stock at \$50 but how much quantity (units) of that stock can i buy with those 10\$.

can i buy 1000 units with that 10\$ so wen i sell its (80x1000) - ((50+10)x 1000) = 20k

0r with that 10\$ can i just buy 1 unit this 80- (50+10) = 20\$ profit

and does that \$10 depend on the stock price? because i may call a Bekshire Hathaway stock with \$10 and because its stock price is very pricey it will fluctuate more in dollar terms.

thanks, and sorry for a long Q
(1 vote)
• Typically a contract is for 100 shares, but the price is quoted per share. In the examples, the lecturer is assuming contracts of one share.