CALL OPTION
The contract which provides right to holder of option to buy an underlying, is known as Call option. However,
writer of option (Opposite party) has obligation to sell underlying.
Mr. W receives Premium from Mr. H for
Mr. H (HOLDER) selling call option (Say, ₹ 10) Mr. W (WRITER)
Buyer of Call option www.fmguru.org Seller of Call option
CA Nagendra Sah
FCA, B. Sc. (H), CFAL1
Mr. H has right to Mr. W has
buy share of ABC Call Option obligation to sale
at 600 at 3- share of ABC at
month time. If you desire, you 600 at
Lot Size
may buy 1000 3-month time, if
Strike Price (K) shares of ABC at Underlying buyer approach
Exercise price (X) to do so.
₹ 600 at 3- Months
Execution Price (X)
time Exercise date or Expiry date
If at 3-month time (i.e. on expiry date) price of a share is more than 600 then buyer exercise his right and
seller is bound to sell share at 600 (i.e. at strike price) even actual market price is higher.
If at 3-month time (i.e. on expiry date) price of a share is less than 600 then right lapses (i.e. buyer does not
exercise his right).
ACTION OF CALL AND SETTLEMENT ON EXPIRY
Market Price on Expiry
(650) CASE-1
Mr.H Exercises right &
Buy share at ₹600
H
₹50 W
Payoff
Strike Price
(600)
Option Lapses
NIL
H W
Payoff
Market Price on Expiry
(572) CASE-2
CASE-1: (On Expiry Price = ₹650)
Mr. H Profit/Loss (Net payoff) = Payoff received – premium paid = ₹50 - ₹10 = ₹40
Mr. W Profit/Loss(Net payoff) = Premium Received – Payoff Paid = ₹10- ₹50 = - ₹40
CASE-2: (On Expiry Price = ₹572)
Mr. H Profit/Loss (Net payoff) = Payoff received – premium paid = ₹0 - ₹ 10 = - ₹10
Mr. W Profit/Loss (Net payoff)= Premium Received – Payoff Paid = ₹10- ₹0 = ₹10
PAYOFF GRAPH OF CALL OPTION
Assuming, Strike price of Call = ₹600 and Premium = ₹10
SITUATIONS I II III IV V VI VII VIII
MP on expiry
₹580 ₹590 ₹600 ₹610 ₹620 ₹630 ₹640 ₹650
Strike Price (K)
₹600 ₹600 ₹600 ₹600 ₹600 ₹600 ₹600 ₹600
Action
Lapse Lapse Lapse Exercise Exercise Exercise Exercise Exercise
Payoff
0 0 0 ₹10 ₹20 ₹30 ₹40 ₹50
Premium
₹10 ₹10 ₹10 ₹10 ₹10 ₹10 ₹10 ₹10
Net Profit/Loss (₹)
-10 -10 -10 0 10 20 30 40
( Call Holder)
Net Profit/Loss (₹)
10 10 10 0 -10 -20 -30 -40
(Call Writer)
NET PAYOFF GRAPH OF CALL OPTION FOR BOTH HOLDER AND WRITER
50
www.fmguru.org
40
CA Nagendra Sah
FCA, B. Sc. (H), CFAL1
30
20 Profit (H)
High Probability
Net Profit/Loss
10 Low Probability
Profit (W)
0
₹ 580 ₹ 590 ₹ 600.0 610 ₹ 620 ₹ 630 ₹ 640 ₹ 650
Loss (H)
-10 (BEP)
Loss (W)
High Probability
-20 Low Probability
-30
H HOLDER
-40
W WRITER
-50
Price of share on Expiry
Analysis of Call Option
For Holder of call For Writer of call
It provides right to receive upside difference It provides obligation to pay upside difference
Earns profit when price moves up Earns profit when price moves down or remains stable
Premium Outflow at beginning. Premium Inflow at beginning.
Payoff Inflow at expiry (If exercise) Payoff Outflow at expiry (If exercise)
Payoff (Inflow) = (MP-K) Payoff (Outflow) = (MP-K)
Net P/L (Net payoff)= Payoff-Premium Net P/L (Net payoff) = Premium-Payoff
BEP = Strike price + Premium BEP = Premium + Strike price
Maximum Gain = Unlimited Maximum Gain = Premium
Maximum Loss = Premium Maximum Loss = Unlimited
PUT OPTION
The contract which provides right to sell an underlying, is known as Put Option.
In other words, Put Option provides right to receive downside difference.
Mr. W receives Premium from Mr. H for
Mr. H (HOLDER) buying put option. (Say, ₹ 10) Mr. W (WRITER)
Buyer of Put option www.fmguru.org
Seller of put option
CA Nagendra Sah
FCA, B. Sc. (H), CFAL1
Mr. H has right Mr. W has
to sell share of Put Option obligation to buy
ABC at 600 at share of ABC at
If you desire, you
3-month time. 600 at 3-month
may sell 1000 Lot Size
Underlying time, if seller
shares of ABC at
approach to do
Strike Price (K) ₹ 600 at so.
Exercise price (X) 3- Months time
Execution Price (X) Exercise date or Expiry date
If at 3-month time (i.e. on Expiry date) price of a share is less than 600 then buyer of put option exercise his
right and seller of put option is bound to buy share at 600 (i.e. at strike price) even actual market price is less.
If at 3-month time (i.e. on Expiry date) price of a share is higher than 600 then option lapses
ACTION OF PUT AND SETTLEMENT ON EXPIRY
Market Price on Expiry
(650) CASE-1
Option Lapses
NIL
Payoff
Strike Price
Mr.H Exercises right & (600)
Sell share at ₹600
H
₹40
W
Payoff Market Price on Expiry
(560) CASE-2
CASE-1: (On Expiry Price = ₹650)
Mr. H Profit/Loss (Net payoff) = Payoff Received – Premium paid = ₹0 - ₹10 = - ₹10
Mr. W Profit/Loss(Net payoff) = Premium Received – Payoff Paid = ₹10- ₹0 = ₹10
CASE-2: (On Expiry Price = ₹560)
Mr. H Profit/Loss (Net payoff) = Payoff Received – Premium paid = ₹40 - ₹ 10 = ₹30
Mr. W Profit/Loss (Net payoff) = Premium Received – Payoff Paid = ₹10- ₹40 = - ₹30
PAYOFF GRAPH OF PUT OPTION
Assuming, Strike price of Put = ₹600 and Premium = ₹10
SITUATIONS I II III IV V VI VII VIII
MP on expiry
₹550 ₹560 ₹570 ₹580 ₹590 ₹600 ₹610 ₹620
Strike Price (K)
₹600 ₹600 ₹600 ₹600 ₹600 ₹600 ₹600 ₹600
Action
Exercise Exercise Exercise Exercise Exercise Lapse Lapse Lapse
Payoff
₹50 ₹40 ₹30 ₹20 ₹10 0 0 0
Premium
₹10 ₹10 ₹10 ₹10 ₹10 ₹10 ₹10 ₹10
Net Profit/Loss (₹)
40 30 20 10 0 -10 -10 -10
( Put Holder)
Net Profit/Loss (₹)
-40 -30 -20 -10 0 10 10 10
(Put Writer)
NET PAYOFF GRAPH OF PUT OPTION FOR BOTH HOLDER & WRITER
50
www.fmguru.org
40
CA Nagendra Sah
FCA, B. Sc. (H), CFAL1
30
20
Profit (H) High Probability
Net Profit/Loss
10 Low Probability
Profit (W)
0
₹ 550.00 ₹ 560 ₹ 570 ₹ 580.0 590 ₹ 600 ₹ 610 ₹ 620
(BEP) Loss (H)
-10
Loss (W) High Probability
-20 Low Probability
-30
H HOLDER
-40
W WRITER
-50
Price of share on Expiry
ANALYSIS OF PUT OPTION
For Holder of Put For Writer of Put
It provides right to receive downside difference It provides obligation to pay downside difference
Earns profit when price moves down Earns profit when price moves up or remains stable.
Premium Outflow at beginning. Premium Inflow at beginning.
Payoff Inflow at expiry (If exercise) Payoff Outflow at expiry (If exercise)
Payoff (Inflow) = (K-MP) Payoff (Outflow) = (K-MP)
Net P/L (Net payoff) = Payoff-Premium Net P/L (Net payoff) = Premium-Payoff
BEP = Strike price – Premium BEP = Strike price - Premium
Max. Gain = Unlimited up to Zero price of Underlying Max. Gain = Premium
Max. Loss = Premium Max. Loss = Unlimited up to Zero price of Underlying
