Long Calls P/L

Question 1

Long K=$52 Call
S=$48 and Premium=$4

a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?

Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”

Answer 1

Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = -$4.

Full Explanation:
This Long Call allows you to buy shares of stock worth S=$48 for K=$52.

You could easily purchase the stock on the open market for $48, so exercising the option would mean overpaying by $4. We would think of this as a per-share $4 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $4 premium you paid. In hindsight, this money was wasted. P/L = -$4 (per share). Better luck next time!

Question 2

Long K=$48 Call
S=$49 and Premium=$4

a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?

Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”

Answer 2

Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = -$3.

Full Explanation:
This Long Call allows you to buy shares of stock worth S=$49 for K=$48. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K= $48.

That is a discount of $1, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $1. This $1 is the option’s intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$48 and then turn around and sell them on the market for S=$49, netting a $1 profit. You could even take out a short-term loan to do this.)

In addition to the $1 gain, you also paid a premium of $4. Therefore, your final P/L combines the $1 gain and the $4 loss: P/L = $1 - $4 = -$3 (per share).

Question 3

Long K=$76 Call
S=$73 and Premium=$1

a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?

Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”

Answer 3

Short Answer:
a.) Out of The Money, so WON’T be exercised.
b.) P/L = -$1.

Full Explanation:
This Long Call allows you to buy shares of stock worth S=$73 for K=$76.

You could easily purchase the stock on the open market for $73, so exercising the option would mean overpaying by $3. We would think of this as a per-share $3 loss.

Clearly, you won’t exercise the option, so it will just expire worthless. Because you can’t profitably exercise the option, we say the option is “Out of The Money (OTM)” and has no intrinsic value (IV=$0).

The only impact on your P/L is the $1 premium you paid. In hindsight, this money was wasted. P/L = -$1 (per share). Better luck next time!

Question 4

Long K=$60 Call
S=$62 and Premium=$4

a.) Will this option be exercised?
b.) What is your Per-Share Profit or Loss (P/L)?

Note: K stands for “Strike Price.” S stands for “Stock Price (at expiration).”

Answer 4

Short Answer:
a.) In The Money, so WILL be exercised.
b.) P/L = -$2.

Full Explanation:
This Long Call allows you to buy shares of stock worth S=$62 for K=$60. A mnemonic is that you can “Call” the shares to you and someone else (your counterparty) will have to sell them to you for K= $60.

That is a discount of $2, so this option is “In The Money (ITM)” and you will exercise it. When you exercise it, you will gain $2. This $2 is the option’s intrinsic value.

(If you don’t want to buy more shares, you could easily exercise the option to buy them for K=$60 and then turn around and sell them on the market for S=$62, netting a $2 profit. You could even take out a short-term loan to do this.)

In addition to the $2 gain, you also paid a premium of $4. Therefore, your final P/L combines the $2 gain and the $4 loss: P/L = $2 - $4 = -$2 (per share).