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Call Options
A call option is the right to buy a stock at the strike price on a specified date. A call option is only exercised if the strike price X is lower than the market price S and the pay off is the difference between the strike price and stock price.
Intrinsic Value
The intrinsic value of a call option is the greater of: zero (0) or S - X (Stock Price - Strike Price).
For example:
A call option with a strike price of $30 has an intrinsic value of $20 when the underlying stock is priced at $50, and the option has an intrinsic value of $0 when the underlying stock is priced at $10.
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Example: Call Options
Complete the following table, giving the payoffs for various stock prices for a call option buyer who buys a call option with a strike price of $40.
Graph the payoffs
Practice: Call Options
Show the option pay-offs for both the long and short positions for a call option with a strike price of $25. Show the pay-offs for the following stock prices: $0, $10, $20, $30, $40 and $50. Graph your results.
| $0 | $10 | $20 | $30 | $40 | $50 | |
| Long payoff | ||||||
| Short payoff |