P&L of a Long Call
Outcome 1: Profit
With a long call position, you are committing to a bullish stock sentiment, believing that the stock will increase in value and rise in price. There is unlimited profit potential. Let’s now assume we are correct in our sentiment and the stock price rises.
To calculate our profit on the position when we purchased our contracts without borrowing funds, we use the following formula:
Profit = Current Stock Price – Strike Price – Net Premium Paid
Example
Stock XYZ is trading at $50 and you purchase 10 XYZ Jan 50 calls for $1.25.
A week later, stock XYZ is trading higher at $58.
*Unrealized profits are those that potentially exist; realized profits occur when you close out or trade out of the position.
Our maximum profit is unlimited. Remember, the price of XYZ can keep increasing in value.
Outcome 2: Loss
With a long call position, you have paid money (net premium) to establish an options position that gives you access to the stock’s unlimited upside profit potential. This means that your potential losses (or downside risk exposure if the stock declines in price) are known and limited to the net premium paid.
Max Loss = Net Premium Paid
Example
Stock XYZ is trading at $50 and you purchase 10 XYZ Jan 50 calls for $1.25.
At expiration, stock XYZ is trading lower at $43.
*Unrealized profits are those that potentially exist; realized profits occur when you close out or trade out of the position.
Our maximum loss is capped and known.
Outcome 3: Breakeven
The breakeven price for a long call strategy occurs when the stock is trading at a price equal to the strike price plus the net premium paid.
In our example, the breakeven stock price equals $51.25 ($50 + $1.25 = $51.25, not including fees and commissions).
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