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Finance and capital markets
Course: Finance and capital markets > Unit 9
Lesson 1: Put and call options- American call options
- Basic shorting
- American put options
- Call option as leverage
- Put vs. short and leverage
- Call payoff diagram
- Put payoff diagram
- Put as insurance
- Put-call parity
- Long straddle
- Put writer payoff diagrams
- Call writer payoff diagram
- Arbitrage basics
- Put-call parity arbitrage I
- Put-call parity arbitrage II
- Put-call parity clarification
- Actual option quotes
- Option expiration and price
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Call writer payoff diagram
Call Writer Payoff Diagram. Created by Sal Khan.
Want to join the conversation?
- Is it correct to say that just like shorting; a call writer's losses can theoretically be infinite?(3 votes)
- I think, theoretically: yes.(2 votes)
- could how would the profit diagram change if the writer was the stock holder?(3 votes)
- John is correct, the P/L diagram for a situation where the call writer is the holder (called a covered call) is the same as the one shown in the video, the only "benefit" of this situation is that the writer does not lose capital (cash) they only lose asset value(3 votes)
- Wouldn't the profit of the stock holder who was writing the call see an increase in profits until it reached the 50 dollar mark? They would have stock of increased value and the ten dollars?(2 votes)
- The idea is that the writer doesn't hold the stock, and they only buy the stock if the option is exercised.(3 votes)
- In writing a covered call, does the does the writer get to keep the premium ($10) the holder paid for the option, if the option expires?(1 vote)
- Of course. The writer took the risk. That's his payment for it.(2 votes)
- Is selling a call option pretty much dangerous right? Because the stock price can rise up to the stars and so are my losses? Is selling a calling basically shorting a call?(1 vote)
- Selling a "naked call" is shorting
If you own the stock and sell a call, that's a "covered call", and your maximum loss is just the upside you would have had on the stock.(2 votes)
- Part VIII. Accelerated Expiration of Certain Equity Options, of the MAY 2007 SUPPLEMENT, of the "Characteristics and Risks of Standardized Options" booklet states:
Covered writers of an accelerated option may therefore be required to pay the cash amount in respect of the option before they receive the cash payment on the underlying security.
What does this mean for writers of covered calls?(1 vote) - Is the option applied per each stock? for example, if you brought 10 stocks in a company you will also have to buy 10 options?(1 vote)
- Yes you need to buy an equal number of options as the number of shares you desire, divided by 100 as mentioned by Andrew, for example if you want to buy 300 shares you will need to purchase 3 options. The P/L diagram in these situations do not change though as an option is always for that fixed number of shares.(1 vote)
- please explain vertical call payoffs(1 vote)
- What's the difference between shorting a call option and being a writer of the call option?(1 vote)
- When you write an option you're considered to be "short" that option. If you were to buy it you would be considered "long" the option.(1 vote)
- What are the advantages of being a Call Options Seller ? How do the Call Writers anticipate whether or not they are going to get profits ?(0 votes)
- Call writers want the stock to stay below the strike-price. As long as the stock stays below, they get to keep all of the money they got for selling the call. I sell calls often and usually receive about $300/month when my options are not exercised. It is great spending money with low risk.(1 vote)
Video transcript
For the owner of a call
option with a $50 strike price, then the payoff at
expiration ... we're talking about the value of that
position. If the stock is below $50 we wouldn't
exercise it, because we can buy it for cheaper
than the option that the call option is giving us.
If the stock goes above $50 we would exercise
our option to buy at $50. Say the stock is at $60
the underline stock is at $60 on that date at
the expiration date, then we would exercise
our option to buy at $50 and sell at $60 and make $10. We would essentially get
this upside above $50 on the stock. If we think
about ... this is the actual value of the
position, if we want to factor in how much we paid for the option, we would shift this down by $10. As the holder we would pay $10
for that. It would look this this. We would
essentially ... if we don't exercise the option we
loose the amount of money that was a loss that
we have to pay for the option. Then above that
we break even at $60 dollars, and then we
make money above that. At $60 the value of our option is $10, but we paid $10 for it. That's our break even, but then we make money after that. This is from the
perspective of the holder. This is from the
perspective of the holder of the call option. This is
the holder of the call option. What would it
look like if you're the writer of the call option? If your the person selling
the right to buy the stock. If this person right
over here, if the holder has the right to buy
at $50, someone must be selling them that right.
Someone must be agreeing to say hey I will
essentially sell that to you at that price. If you're the writer
of the foot ... we have the holder in green. The holder in green. What if you're the
writer? You're essentially the counter party on
that option. You're the person agreeing to uphold that option. If the option never
gets exercised, then the writer doesn't have to loose any money. If the option does get
exercise, then all of a sudden, the writer starts to loose money. If the writer doesn't
own the stock, and let's say the stock is at $60,
this guy, the holder, can exercise his option
to buy at $50. The writer would then have to go buy
the stock on the market for $60 and sell it for
$50. They would loose $10. The writers payoff would
look something like this. Once again it's the
mirror image of the payoff of the holder. If you
think about the profit of the writer, if the option
is never exercised, then the holder gets to
keep the $10 that they were paid ... that they
sold the right for. If the option is exercised,
and they start to loose money, and their
break even once again is at $60. Anything below
that, then they start to loose more and more
money. Once again these are the mirror images of each other. If you were to add up
these two line it would be break even. These
parties are the ones who are exchanging money between. If this guys makes $10 this guys
loosing $10 or vice versa.