Derivatives - Graphical Interpretations for Calls

At this point, you may find it helpful to see illustrations of how an option can be in- or out-of-the money. These line graphs will not be on the test, so if you find them more confusing than helpful, you can skip over them. They are included in this guide to help you understand the concept of options and see how to compute their "moneyness".

Let's look at a typical long call. Let's say it is 1 MNO May 100 call @ 3; essentially the spot rate for the stock has to rise above $103 ($100 strike price plus $3 premium) to be in-the-money. In fact, the option begins life at $3 out-of-the-money because of the premium.

This graph reflects the point of view of the buyer. The view of the writer - who goes short when she sells a call - is a mirror image:

Figure 8.1: Long Call




Figure 8.2: Short Call


Graphical Interpretations for Puts


Related Articles
  1. Options & Futures

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  2. Options & Futures

    Writing Covered Calls On Dividend Stocks

    Writing covered calls on stocks that pay above-average dividends is a strategy that can be used to boost returns on a portfolio, but it carries some risk.
  3. Options & Futures

    The Dangerous Lure Of Cheap Out-Of-The-Money Options

    Betting on an expected move is fine, but one must understand the risks involved in a position - and consider the alternatives.
  4. Options & Futures

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  5. Options & Futures

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  6. Options & Futures

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  7. Options & Futures

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
  8. Trading Strategies

    Risk Management Techniques For Shorting Call Options (IBM)

    Shorting covered calls is a popular options trade strategy. Here are the methods to mitigate the risk/loss and enhance profits for selling covered calls
  9. Options & Futures

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  10. Options & Futures

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
RELATED TERMS
  1. Call Ratio Backspread

    A very bullish investment strategy that combines options to create ...
  2. Bull Call Spread

    An options strategy that involves purchasing call options at ...
  3. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  4. Writer

    The seller of an option who collects the premium payment from ...
  5. Compound Option

    An option for which the underlying is another option. Therefore, ...
  6. Ratio Call Write

    An option strategy in which an investor owns shares in the underlying ...
RELATED FAQS
  1. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  2. How is a short call used in a covered call option strategy?

    Learn how short calls are used in a covered call option strategy, what the risks and rewards of this strategy are, and how ... Read Answer >>
  3. What is the difference between a covered call and a regular call?

    Learn what a call option is, what two strategies call options can be used for, and the difference between a covered call ... Read Answer >>
  4. What are some examples of horizontal integration?

    Learn about option strategies that investors can use with stocks in the automotive sector, including covered call strategies ... Read Answer >>
  5. Where can I buy covered call ETFs (exchange-traded funds)?

    Learn where to trade covered call option strategies, and how covered calls work including the type of risk associated with ... Read Answer >>
  6. How can I profit with call options?

    Learn what a call option and a long call strategy are, how to speculate stock price increases using a call option and how ... Read Answer >>
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center