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For example, suppose a call option with a strike price of $100 for DEF stock is sold at $1.00 and a call option for DEF with a strike price of $110 is purchased for $0.50, and at the option's expiration the price of the stock or index is less than the short call strike price of $100, then the return generated for this position is:
The calculation uses options that are “at the money,” meaning their strike price—at which an investor has a right to buy or sell the security in question—is identical to their underlying ...
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.
The weighting factors and represent respectively the amount of RR needed to replicate the option's Vanna, and the amount of BF needed to replicate the option's Volga. The above approach ignores the small (but non-zero) fraction of Volga carried by the RR and the small fraction of Vanna carried by the BF.
Option values vary with the value of the underlying instrument over time. The price of the call contract must act as a proxy response for the valuation of: the expected intrinsic value of the option, defined as the expected value of the difference between the strike price and the market value, i.e., max[S−X, 0]. [3]
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.