Option Payoff Profiles

Figure 23.11 shows the general payoff profile for a call option from the owner's viewpoint. The horizontal axis shows the difference between the asset's value and the strike price on the option. As illustrated, if the price of the underlying asset rises above the strike price, then the owner of the option will exercise the option and enjoy a profit. If the value of the asset falls below the strike price, the owner of the option will not exercise it. Notice that this payoff profile does not consider the premium that the buyer paid for the option.

The payoff profile that results from buying a call is repeated in Part A of Figure 23.12. Part B shows the payoff profile on a call option from the seller's side. A call option is a zero-sum game, so the seller's payoff profile is exactly the opposite of the buyer's.

Part C of Figure 23.12 shows the payoff profile for the buyer of a put option. In this case, if the asset's value falls below the strike price, then the buyer profits because the seller of the put must pay the strike price. Part D shows that the seller of the put option loses out when the price falls below the strike price.

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