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The following calculation assumes the sold call option and the purchased put option are both out-of-the-money and the price of the stock at expiration is the same as at entry: %If Unchanged Potential Return = (call option price - put option price) / [stock price - (call option price - put option price)]
In fact, the Black–Scholes formula for the price of a vanilla call option (or put option) can be interpreted by decomposing a call option into an asset-or-nothing call option minus a cash-or-nothing call option, and similarly for a put—the binary options are easier to analyze, and correspond to the two terms in the Black–Scholes formula.
The Black–Scholes formula (hereinafter, "BS Formula") provides an explicit equation for the value of a call option on a non-dividend paying stock. In case the stock pays one or more discrete dividend(s) no closed formula is known, but several approximations can be used, or else the Black–Scholes PDE will have to be solved numerically.
The options trader makes a profit of $200, or the $400 option value (100 shares * 1 contract * $4 value at expiration) minus the $200 premium paid for the call.
For premium support please call: 800-290-4726 more ways to reach us. Sign in. Mail. 24/7 ... Many options calculators will simply provide the implied volatility for you when you input the stock ...
Call option: A call option gives its buyer the right, but not the obligation, to buy a stock at the strike price prior to the expiration date.