# Call Options Profit, Loss, Breakeven

Call Options

2. Call Option Profit, Loss, Breakeven
3. Downside of Buying Call Options

The following is the profit/loss graph at expiration for the call option in the example given on the previous page.

## Break-even

The breakeven point is quite easy to calculate for a call option:

• Breakeven Stock Price = Call Option Strike Price + Premium Paid

To illustrate, the trader purchased the \$52.50 strike price call option for \$0.60. Therefore, \$52.50 + \$0.60 = \$53.10. The trader will breakeven, excluding commissions/slippage, if the stock reaches \$53.10 by expiration.

## Profit

To calculate profits or losses on a call option use the following simple formula:

• Call Option Profit/Loss = Stock Price at Expiration - Breakeven Point

For every dollar the stock price rises once the \$53.10 breakeven barrier has been surpassed, there is a dollar for dollar profit for the options contract. So if the stock gains \$5.00 to \$55.00 by expiration, the owner of the the call option would make \$1.90 per share (\$55.00 stock price - \$53.10 breakeven stock price). So total, the trader would have made \$190 (\$1.90 x 100 shares/contract).

## Partial Loss

If the stock price increased by \$2.75 to close at \$52.75 by expiration, the option trader would lose money. For this example, the trader would have lost \$0.35 per contract (\$52.75 stock price - \$53.10 breakeven stock price). Therefore, the hypothetical trader would have lost \$35 (-\$0.35 x 100 shares/contract).

To summarize, in this partial loss example, the option trader bought a call option because they thought that the stock was going to rise. The trader was right, the stock did rise by \$2.75, however, the trader was not right enough. The stock needed to move higher by at least \$3.10 to \$53.10 to breakeven or make money.

## Complete Loss

If the stock did not move higher than the strike price of the option contract by expiration, the option trader would lose their entire premium paid \$0.60. Likewise, if the stock moved down, irrelavent by how much it moved downward, then the option trader would still lose the \$0.60 paid for the option. In either of those two circumstances, the trader would have lost \$60 (-\$0.60 x 100 shares/contract).

Again, this is where the limited risk part of option buying comes in: the stock could have dropped 20 points, but the option contract owner would still only lose their premium paid, in this case \$0.60.

Buying call options has many positive benefits like defined-risk and leverage, but like everything else, it has its downside, which is explored on the next page.

Next Page - Dangers of Buying Call Options