Long call and long put profit at expiration

Call profit: what it's worth minus what you paid

You bought a call, and the stock went up. How much did you make? A call is the right to buy a stock at the strike price. The strike price is the set price in the contract.

Say you buy one March 40 call for a premium of 2. The premium is what you pay for the option. At expiration, the stock closes at 46. You can buy at 40 something worth 46. That's 6 a share. When the stock is above a call's strike, the call is in the money.

But you paid 2 for the call. Take that off, and you're up 4 a share. One contract covers 100 shares. So 4 times 100 is a $400 profit.

The rule for a long call at expiration: close, minus strike, minus premium, times 100. The slip is stopping at 6 times 100, or $600. That forgets the 2 you paid.

Call profit is what the call is worth at the close, minus the premium you paid, times 100.

Put profit flips the first subtraction

Calls make money when the stock rises. How do you figure the profit on a put? A put is the right to sell a stock at the strike price. So a put buyer wants the stock to fall.

Say you buy one July 40 put for a premium of 2. At expiration, the stock closes at 35. You can sell at 40 something worth 35. That's 5 a share. When the stock is below a put's strike, the put is in the money.

Take off the 2 you paid for the put. You're up 3 a share. One contract covers 100 shares, so 3 times 100 is a $300 profit.

The put rule flips the first step: strike, minus close, minus premium, times 100. For a call, it's close minus strike. The slip is using the call order on a put. You'd get 35 minus 40, a negative number, and a wrong answer.

Put profit is what the put is worth at the close, minus the premium you paid, times 100.

Out of the money, a buyer loses the premium

What happens if the stock moves the wrong way for your option? An option is out of the money when using it wouldn't pay. For a call, the stock is below the strike. For a put, it's above.

Say you buy two March 70 calls for 4 each. At expiration, the stock closes at 66. No one uses a right to buy at 70 when the market price is 66. So the calls expire worthless.

Your loss is the premium you paid. 4 times 100 shares is $400 a contract. Two contracts make it $800. Look at the chart. However far below 70 the stock falls, the loss stays the same. The premium is all a buyer can lose.

In the money doesn't always mean a profit. At 72, each call is worth 2 but cost 4. Selling or exercising gets back 2, so you lose 2 a share. The slip is letting it expire because it shows a loss. That throws away the 2 it's still worth.

When an option ends out of the money, it expires worthless. The buyer loses the premium and no more.

Worked example: Call profit, step by step

1. Here's how the exam asks it. You buy 1 ABC March 40 call at 4. ABC closes at 51. What's the profit?
2. Step one: what's the call worth at the close? You can buy at 40 something worth 51. That's 11 a share.
3. Step two: take off the 4 premium, because you paid it. 11 minus 4 is 7.
4. Step three: one contract covers 100 shares. 7 times 100 is $700.
5. The trap is B, $1,100. It multiplies the 11 by 100 and forgets the premium you paid.

Common mistakes

Profit comes after the premium

Got $500 on this put? The premium is missing. The put is worth strike minus close. 40 minus 35 is 5. Take off the 2 you paid. That leaves 3. Times 100 shares is $300, not $500. Profit is what's left after the premium.