What you will learn
- Subtract premium before describing a long-option profit.
- Apply the contract multiplier to both payoff and premium.
Call Option
At expiry a call is worth something only if the underlying price is above the strike, and its payoff per unit is that excess. The buyer's break-even at expiry is the strike plus the premium, because the premium must be recovered before there is any profit.
The buyer's loss is capped at the premium, while the potential gain rises as the underlying price rises. A seller who does not own the underlying faces theoretically unlimited loss; a covered call seller owns the shares, which caps upside in exchange for premium income.
Put Option
At expiry a put has value only if the underlying price is below the strike, and its payoff per unit is the gap between the strike and that price. The buyer's break-even is the strike minus the premium. Because a price cannot fall below zero, a put's maximum payoff per unit is the strike.
Buyers use puts to hedge a holding, like insurance with a premium cost, or to take a falling-price view with a defined maximum loss. A put seller collects the premium but may have to buy the underlying at the strike, so a sharp fall can cause losses far larger than the premium.
Leverage
Leverage is often stated as position value divided by your own capital, so 5x means HK$5 of exposure per HK$1 of capital. It can come from margin loans, futures, options or corporate borrowing. Before costs, the percentage gain or loss on your capital is roughly the leverage multiple times the asset's percentage move.
Because losses scale the same way, a modest adverse move can eliminate all the capital: at 5x, a 20% fall does it, and at 10x a 10% fall. Interest, margin calls and forced selling can turn a temporary decline into a permanent loss. Leverage does not create returns; it changes risk.
Worked example: A positive payoff can still lose money
Illustrative: a long call has strike HK$50, premium HK$3 and multiplier 100. At expiration, an underlying price of HK$52 gives payoff HK$200 but profit of HK$200 − HK$300 = −HK$100 before costs. At HK$55, payoff is HK$500 and profit HK$200. A small initial premium supports price-sensitive exposure, but does not make the outcome safe.
Check your understanding
A long put has strike HK$40, premium HK$2 and multiplier 100. At expiration the underlying is HK$35. What are payoff and pre-cost profit?
Show answer and explanation
Payoff = (40 − 35) × 100 = HK$500. Premium = 2 × 100 = HK$200, so profit = HK$300. Exercise, settlement and fees still follow the contract rules.