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Current time:0:00Total duration:3:08

Video transcript

if we're the owner of a call option with a $50 strike price then the payoff at expiration so we're just 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 but if the stock goes above 50 we would exercise our option to buy at 50 and say the stock is at 60 the underlying stock is at 60 on that date at the expiration date then we would exercise our option to buy it 50 and sell at 60 and make $10 so we would essentially get this up side above 50 on the stock and 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 just shift this down by 10 dollars because as the holder we would pay $10 for that so it would look like this we would essentially if we don't exercise the option we lose the amount of money that was a loss that we had to pay for the option but then above that we break we break-even at $60 and then we make money above that because it's $60 the value of our option is $10 but we paid $10 for it so that's our breakeven but then we make money after that so 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 you're 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 if you to say hey I I will essentially sell that to you at that price so if you're the writer of the foot so let's see we have the holder in green we have the holder ingredient but what if you were the writer you're essentially the counterparty on that option you're the person agreeing to uphold that option so the option never gets exercised then the writer the writer doesn't have to lose any money but if the option does to get exercised then of us all of a sudden the writer starts to lose money because 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 it 50 the writer would then have to we'll buy the stock on the market for $60 and sell it for 50 so they would lose $10 so the writers payoff would look something it 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 if the option is never exercised then the holder just too gets to keep the $10 that they were paid for that they sold the right for but then if the option is exercised then they start to lose money and their breakeven once again is at $60 and anything below that then they start to lose more and more money but once again these are the mirror images of each other and if you were to add up these two lines it would be break-even because these parties are the ones who are exchanging money between if one of if this guy makes $10 this guy's losing $10 or vice-versa