Chapter 6: How options work?

Suppose an investor has a bullish view on the stock XYZ. On 1st March, the stock price of XYZ is $67. A call option of XYZ expires in May, with strike price of $70 is selling at $3. The contract size of XYZ option is 100 shares per contract. Therefore, ignoring commission and other fees, the investor needs to pay $300 (i.e. $3 x 100) Price of XYZ $70 May Call Option = $3
Contract value on hand = $3 x 100 = $300 to buy one contract of the call option.

As the cost of the option is $3 per share and the strike price is $70, the breakeven price of this trade is $73 (i.e. $3 + $70).

Suppose one month later, the stock price goes up to $80.

The price of the call option goes up to $11, i.e. the contract is now worth $11 x 100 = $1100.

At this moment, the investor has a profit of $1100 - $300 = $800 Price of XYZ $70 May Call Option = $11
Contract value on hand = $11 x 100 = $1100
Profit if sell to close the position = $110 - $300 = $800 should he chooses to close out the position by selling out this option contract.

However, the investor thinks the stock price will continue to rise and keeps holding the option contract.

By the expiration date, unfortunately the stock price drops to $68. The option becomes out-of-the-money, i.e. worthless, as it is below the strike price ($70) at expiry. The investor loses the $300 Price of XYZ $70 May Call Option = $0
Contract value on hand = $0 x 100 = $0
Loss $300 invested in the option he invested.

The profit and loss swing is best summarised in the following table: