A call option is a type of derivative. That is, call options derive their value from the value of another asset. There are two main types of options, call options and put options. Call options allow the buyer to purchase the underlying asset at a certain price in the future. Put options allow the buyer to sell the underlying asset at a certain price in the future. The price in the future is referred to as the strike price and is used to determine the current value of the call option until expiration.
Determine the cost of the call option. This is the price paid for the call option which is usually shown on your trade ticket or statement. Assume the price of the call option is $2.
Research the strike price of the call option. Call options are priced based on the strike price, so this is also listed on the trade ticket and/or your brokerage statement. Assume the strike price of the call is $20.
Determine the current value of the underlying asset. The underlying asset is the stock or asset the call option is derived from. For instance, if you have a call option for XYZ stock, you need to look up the current price for XYZ stock. There are many different types of assets for which call options are written on, however, stock is the most common. Look up the current price on your favorite investment research site like Yahoo! Finance, Google Finance or MSN. You can also call your broker or financial adviser. Assume the current price of the stock is $25.
Subtract the strike price of the asset from the current price of the asset. In this example, the calculation is $25 minus $20 or $5. If the current price is less than the strike price, the answer would be negative, which denotes a loss.
Calculate the profit or loss from the call option. Subtract the cost of the call option from the difference between the strike price and the current price (Step 4). In this example, the answer is $5 minus $2 which equals $3. If the difference between the strike price and the current price is negative, the loss would be greater.
- MorningStar: Call and Put Options on Stocks
- MorningStar: Understanding Option Pricing
- Securities and Exchange Commission. "Investor Bulletin: An Introduction to Options." Accessed July 2, 2020.
- Securities and Exchange Commission. "Rule 5: Option Contracts Traded on the Exchange," Page 14. Accessed July 2, 2020.
- Chicago Board Options Exchange. "Understanding Stock Options." Accessed July 2, 2020.
- Chicago Board Options Exchange. "Options Quick Facts - Equity Calls & Puts." Accessed July 2, 2020.
- Chicago Board Options Exchange. "Options Quick Facts - Terminology." Accessed July 2, 2020.
James Collins has worked as a freelance writer since 2005. His work appears online, focusing on business and financial topics. He holds a Bachelor of Science in horticulture science from Pennsylvania State University.