Module 5   Introduction to Options Trading (Video Series)Chapter 3

Long Call Payoff and Short Call Trade

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3.1 – Buying call option

In the previous videos, we understood the broad context under which it makes sense to buy a call option. This chapter will formally structure our thoughts on the call option and get a firm understanding of both buying and selling of the call option.

We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.


Key takeaways from this chapter

  1. It makes sense to be a buyer of a call option when you expect the underlying price to increase.
  2. If the underlying price remains flat or goes down, then the call option buyer loses money.
  3. The money the buyer of the call option would lose is equivalent to the premium (agreement fees) the buyer pays to the seller/writer of the call option.
  4. The intrinsic value (IV) of a call option is a non-negative number
  5. IV = Max[0, (spot price – strike price)]
  6. The maximum loss the buyer of a call option experiences is to the extent of the premium paid. The loss is experienced as long as the spot price is below the strike price.
  7. The call option buyer has the potential to make unlimited profits, provided the spot price moves higher than the strike price.
  8. Though the call option is supposed to make a profit when the spot price moves above the strike price, the call option buyer first needs to recover the premium he has paid.
  9. The point at which the call option buyer completely recovers the premium he has paid is called the breakeven point.
  10. The call option buyer truly starts making a profit only beyond the breakeven point (which naturally is above the strike price)

20 comments

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  1. Ayushmaan says:

    From where we can find the next part of the videos in the modules

  2. Kaushik says:

    This is the first series of videos I have watched, and they are invaluable to a brand new entrant to the market! Keep up the good work.

    The P&L chart in your example had a negative even beyond the 477.5 spot price for SBI. I assume that was a typo?

    • Karthik Rangappa says:

      Glad you liked it, Kaushik. Yes, that’s a typo, we have put a pinned message on Youtube, will put the same here as well 🙂

  3. Vijay shinde says:

    What if I didn’t square off my option call and it’s in the money and facing loss at close of expiry , will i just have to pay premium and can get out of situation or I’ll have to bear the loss

  4. Munsh says:

    Against possible expiry 495……P&L….should be +17.5

  5. SAJAN JOSEPH says:

    sir
    CAN YOU MAKE ONE MOULE FOR PRICE ACTION TRADING

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