This app calculates the gain or loss from buying a call stock option. The gain or loss is calculated at expiration.
When purchasing a call option you are buying the right to purchase a stock at the strike price at a future date. This is a bullish trade as you are speculating the underlying stock price will increase.
If the price of the stock is greater than the strike price, the option buyer would use the right to purchase at the strike price. The option buyer can then immediately sell the option at the market price for a profit. On the other hand, the buyer can keep the shares.
If the stock price is less than the strike price the buyer would not use the right. In this case the buyer could simply purchase the stock on the open market at a lower price.
Note, this calculator does not take into account the commission paid to the stock broker.
This example will use a house instead of a stock to explain options. Most likely, this will be more easily understood than using stocks.
- You believe the value of a particular house with a value of $200,000 is expected to rise in the future.
- You do not want to purchase the house or do not have sufficient funds or credit for the purchase.
You approach the owner and talk about an option to buy the house in the future. You and the house owner agree to the following contract.
- The contract will expire 1 year from today.
- The selling price of the house will be $210,000.
- To enter the contract you have to pay the house owner $10,000.
- You can exercise the contract at anytime.
After one year, the value of the house rises to $300,000. Therefore, you exercise your option to purchase house. You pay the owner $210,000. You then immediately sell the house for $300,000 making a $80,000 profit. Note, you have already paid the owner $10,000 to enter the contract ($300,000 - $210,000 - $10,000 = $80,000).
After one year, the value of the house only rises to $205,000. Therefore, you would not exercise your option. It would not make sense to pay $210,000 for a house valued at only $205,000. You would have lost $10,000. The amount you agreed to pay to enter the contract.
Note in either of the cases, the owner keeps your $10,000.
Since the contract allows you to exercise the option at any time, you could exercise anytime during the year. You might want to exercise the option if the price has spiked or peaked earlier than the one year expiration.
Use this calculator at your own risk. This calculator may or may not be accurate or reliable. By using this calculator you acknowledge any reliance on this calculator shall be at your sole risk. This page is for educational purposes only. It does not provide investment advise.
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