OPTION BASIC :- PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION........14.02.2013

OPTION BASIC :- PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION :-

A CALL OPTION GIVES THE RIGHT TO THE BUYER TO BUY THE UNDERLYING ASSETS (STOCK, INDEX ETC.) AT A STRIKE PRICE SPECIFIED IN THE OPTION.

TAKING LONG POSITION IN THE CALL OPTION MEANS YOU ARE BULLISH ON THE PARTICULAR LEVEL OF THE STOCK OR INDEX. 

FOR EXAMPLE: - IF YOU BUY OR LONG NIFTY 5900 CALL MAY EXPIRY 2011 @ RS. 35/- AND NIFTY SPOT IS AT 5785 CURRENT LEVEL ON 28 APRIL 2011, IT MEANS YOU ARE BULLISH IN NIFTY AT 5900 MEANS TO SAY NIFTY SPOT CAN GO UP TO 5900 AND CAN ALSO CROSS THIS LEVEL FROM THE CURRENT LEVEL THAT IS 5785.

SO BUYING A CALL OR TAKING LONG POSITION IN CALL MEANS YOU ARE VERY BULLISH AND EXPECT THE UNDERLYING STOCK / INDEX TO RISE IN THE FUTURE AT PARTICULAR STRIKE PRICE THAT YOU HAVE DECIDED. IN THE CASE OF ABOVE EXAMPLE YOU ARE BULLISH ON NIFTY AT 5900 MEANS TO SAY NIFTY SPOT WILL RISE IN THE FUTURE UP TO 5900 AND CAN CROSS ALSO THIS LEVEL FROM ITS CURRENT LEVEL WHICH IS 5785 ON 28 APRIL 2011 AND TIME IS ALSO DECIDED FOR THAT WHICH IS MAY EXPIRY.

PROFIT IN CASE OF TAKING LONG POSITION IN CALL OPTION :- PROFIT IS UNLIMITED IN CASE OF BUYING THE CALL OPTION. AS IT IS EARLIER EXPLAINED THAT WHEN THE OPTION IS IN -THE- MONEY THEN THERE WILL BE PROFIT, MEANS TO SAY "IN CASE OF LONG CALL THE PROFIT WILL BE SPOT PRICE > STRIKE PRICE ON EXPIRY"

IN CASE OF ABOVE EXAMPLE LONG POSITION HAS TAKEN IN NIFTY 5900 CALL AND THE CURRENT LEVEL OF NIFTY SPOT IS 5785, MEANS YOU WILL BE IN PROFIT IF NIFTY SPOT WILL BE GREATER THAN FROM YOUR STRIKE PRICE THAT YOU HAVE SELECTED TO BUY THE CALL OPTION.

SO PROFIT = DIFFERENCE BETWEEN THE SPOT PRICE AND STRIKE PRICE - PREMIUM PAID FOR BUYING THE CALL OPTION

LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION :- LOSS IS LIMITED TO PREMIUM PAID FOR BUYING THE CALL OPTION IN LONG CALL OPTION. MEANS IF NIFTY SPOT CLOSES BELOW FROM YOUR STRIKE PRICE THAT YOU HAVE CHOSEN TO BUY THE OPTION THEN YOU WILL LOSE YOUR WHOLE PREMIUM THAT YOU HAVE PAID FOR BUYING THE OPTION.

IN CASE OF ABOVE EXAMPLE LONG POSITION HAS TAKEN IN  NIFTY 5900 CALL  MAY EXPIRY @ RS. 35/- . IF NIFTY SPOT CLOSES BELOW 5900 OR AT 5900 ALSO THEN YOU WILL LOSE WHOLE PREMIUM OF THE OPTION THAT IS RS. 35/-.

THE FOLLOWING TABLE WILL CLEAR THE PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION ON THE BASIS OF ABOVE EXAMPLE :- 

FROM THE ABOVE TABLE IT IS CLEAR THAT IF NIFTY SPOT CLOSES AT 5900 TO 5500 ON EXPIRY MEANS AT STRIKE PRICE OR BELOW THE STRIKE PRICE OF LONG CALL THEN LOSS IS SAME AT EACH LEVEL WHICH IS RS. -35/- PREMIUM THAT HAS PAID FOR BUYING THE CALL OPTION AND IF NIFTY SPOT CLOSES ABOVE THE STRIKE PRICE WHICH IS 5900 ON EXPIRY THEN PROFIT INCREASES AS THE NIFTY SPOT INCREASES.

SO PROFIT & LOSS IN CASE OF TAKING LONG POSITION IN CALL OPTION :-

PROFIT :- UNLIMITED

LOSS :- LIMITED TO AMOUNT OF PREMIUM PAID FOR BUYING THE CALL OPTION

NOTE :- ALL THE DIGITS ARE ASSUMED AND NOT BASED ON ACTUAL FIGURE.