How this calculator works
An equity option contract usually covers 100 shares. The buyer pays a premium per share for the right, but not the obligation, to buy at the strike price for a call or sell at the strike price for a put. At expiry, a call is worth the amount by which the underlying price exceeds the strike, and a put is worth the amount by which the strike exceeds the underlying price. If the option is out of the money it expires worthless. Profit is the expiry value minus the premium paid, and the breakeven price is the strike plus the premium for a call, or the strike minus the premium for a put. The model holds the position to expiry and ignores commissions, bid-ask spread and taxes.
Formula
Call value at expiry per share = max(0, S - K). Put value per share = max(0, K - S). Profit = (value per share - premium) x contracts x 100. Call breakeven = K + premium. Put breakeven = K - premium. Return = profit / (premium x contracts x 100).
Worked example
A call with a $100 strike bought for $5 covers one contract of 100 shares for $500. If the stock is at $120 at expiry the option is worth $20 a share, or $2,000, so the profit is $1,500 and the return on the premium is 300%. The breakeven price is $105. If the stock finishes at $100 the option expires worthless and the loss is the $500 premium.
Advertisement
Frequently asked questions
Why does the breakeven differ from the strike?
You must recover the premium as well as reach the strike. A call buyer needs the underlying above the strike plus the premium, and a put buyer needs it below the strike minus the premium.
What is the maximum loss on a long option?
The premium paid, because an option cannot become a liability for the buyer. A writer of the option faces a much larger, and in the case of a naked call potentially unlimited, exposure.
Does this value the option before expiry?
No. It is an expiry payoff, not a model price. Before expiry an option still carries time value, which the Black-Scholes page estimates for European options.
Are there taxes or fees?
Not in this model. Commissions, exchange fees, the bid-ask spread and any taxes on gains reduce the real result.