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This is the first part of the Option Payoff Excel Tutorial. In this part we will learn how to calculate single option call or put profit or loss for a given underlying price. This is the basic building block that will allow us to calculate profit or loss for positions composed of multiple optionsdraw payoff diagrams in Exceland calculate risk-reward ratios and break-even points.

It is a function that calculates how much money we make or lose at a particular underlying price. In the above example you can identify several inputs that our payoff formula will take — they are the numbers we already know:. In an Excel spreadsheet, we first need to set up three cells where we will enter the options profit and loss formula, and another cell which will show the output. I have decided to enter the strike, initial price and underlying price inputs in cells C4, C5, C6, respectively.

The result will be shown in cell C8. While not necessary for a simple calculation like this one, it is a good idea to somehow graphically differentiate input and output cells, especially when you are building a more complex spreadsheet. It will make the sheet much easier to use and reduce the risk of you or someone else accidentally overwriting your formulas in the future.

It options profit and loss formula best to do this consistently across all your spreadsheets. Personally, I always make the background of input cells where user is expected to enter values yellow and the output cells which typically contain formulas and should not be overwritten green — just my habit, you can of course use different colors, fonts, borders, or other formatting. Now we have the cells ready and we can options profit and loss formula the formula in cell C8, which will use the inputs in the other cells to calculate profit or loss.

In general, call option value not profit or loss at expiration at a given underlying price is equal to the greater of:. Now we need to implement this formula in Excel.

It is very easy, because Excel has the MAX function, which takes a set of values separated with commas and returns the greatest of them. In our example, the formula in cell C8 will be:. With the inputs in our example 45 and 49cell C8 should now be showing 4. You can test different values for the underlying price input and see how the formula works.

For any underlying price smaller than or equal to 45 it should return zero; for values greater than 45 it should return the difference between cells C6 and C4. This is again very simple to do — we will just subtract cell C5 from the result in cell C8. The entire formula in C8 becomes:. Cell C8 should now be showing 1. You can again test different input values. For put options the logic and formula is almost the same, with just one little difference: The put option profit or loss formula in cell G8 is:.

Now we have options profit and loss formula simple payoff calculators for call and put options. However, there are still some things we can improve or add to make our spreadsheet more useful. Furthermore, our calculator only shows profit or loss per share, while many people are actually more interested in total dollar profit or loss, especially when working with positions of multiple option contracts.

Therefore, we should improve our calculations to also consider direction long or shortposition size number of contracts and contract size number of shares represented by one option contract. We will merge our call and put calculations options profit and loss formula the next part of the tutorial. If you don't agree with any part of this Agreement, please leave the website now.

All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong. Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time. Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. For example, it answers the following question: Payoff Formula Inputs and Outputs In the above example you can identify several inputs that our payoff formula will take — they are the numbers we already know: Preparing the Cells In an Options profit and loss formula spreadsheet, we first need to set up three cells where we will enter the inputs, and another cell which will show the output.

Call Option Value Formula Now we have the cells ready and we can build the formula in cell C8, which will use the inputs in the other cells to options profit and loss formula profit or loss. In general, call option value not profit or loss at expiration at a given underlying price is equal to the greater of: In our example, the formula in cell C8 will be: But we are not finished yet.

The entire formula in C8 becomes: Put Option Profit or Loss Formula For put options the logic and formula is almost the same, with just one options profit and loss formula difference: The put option profit or loss formula in cell G8 is: The result with the inputs shown above 45, 2.

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Here you can see the same for put option payoff. And here the same for short call position the inverse of long call. Buying a call option is the simplest of option trades. A call option gives you the right, but not obligation, to buy the underlying security at the given strike price. Below the strike, the payoff chart is constant and negative the trade is a loss.

For example, if underlying price is Same as scenario 1 in fact. Finally, this is the scenario which a call option holder is hoping for. Because the option gives you the right to buy the underlying at strike price If you bought the option at 2. You can also see this in the payoff diagram where underlying price X-axis is Initial cash flow is constant — the same under all scenarios.

It is a product of three things:. Of course, with a long call position the initial cash flow is negative, as you are buying the options in the beginning. The second component of a call option payoff, cash flow at expiration, varies depending on underlying price. That said, it is actually quite simple and you can construct it from the scenarios discussed above. If underlying price is below than or equal to strike price, the cash flow at expiration is always zero, as you just let the option expire and do nothing.

If underlying price is above the strike price, you exercise the option and you can immediately sell it on the market at the current underlying price.

Therefore the cash flow is the difference between underlying price and strike price, times number of shares. Putting all the scenarios together, we can say that the cash flow at expiration is equal to the greater of:. It is the same formula. The screenshot below illustrates call option payoff calculation in Excel. Besides the MAX function, which is very simple, it is all basic arithmetics.

One other thing you may want to calculate is the exact underlying price where your long call position starts to be profitable.

If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong. Macroption is not liable for any damages resulting from using the content. No financial, investment or trading advice is given at any time.

Home Calculators Tutorials About Contact. Tutorial 1 Tutorial 2 Tutorial 3 Tutorial 4. We will look at: Call Option Payoff Diagram Buying a call option is the simplest of option trades. The key variables are: Strike price 45 in the example above Initial price at which you have bought the option 2.

Call Option Scenarios and Profit or Loss Three things can generally happen when you are long a call option. Underlying price is higher than strike price Finally, this is the scenario which a call option holder is hoping for.

Call Option Payoff Formula The total profit or loss from a long call trade is always a sum of two things: Initial cash flow Cash flow at expiration Initial cash flow Initial cash flow is constant — the same under all scenarios. It is a product of three things: Cash flow at expiration The second component of a call option payoff, cash flow at expiration, varies depending on underlying price.

Call Option Break-Even Point Calculation One other thing you may want to calculate is the exact underlying price where your long call position starts to be profitable. It is very simple. It is the sum of strike price and initial option price.

Long Call Option Payoff Summary A long call option position is bullish, with limited risk and unlimited upside. Maximum possible loss is equal to initial cost of the option and applies for underlying price below than or equal to the strike price.

With underlying price above the strike, the payoff rises in proportion with underlying price. The position turns profitable at break-even underlying price equal to the sum of strike price and initial option price.