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Chapter 1. Introduction to Options > Risk Profile Charts for Call Options - Pg. 18

18 Options Made Easy, Second Edition Quick Summary Option prices are affected by the type of option (call or put): 1. the price of the underlying asset 2. the exercise price (or strike price) of the option 3. the expiration date 4. volatility--Implied and Historical (see Chapter 6, "An Introduction to the Greeks") 5. risk-free interest rate 6. dividends and stock splits Risk Profile Charts for Call Options Now that you know what makes up the valuation of an option, let's look at the risk profile of a call option. We already know that a call option is the right to buy an asset. Logically, this suggests that the call option risk profile direction will be similar to that of buying the asset itself. So let's have a look at an example: Chart 1.3 Long Call option risk profile. As stock price rises over $50, the buyer of the call begins to move into profit. However, you also have to recover the price of the call you paid for (here $7.33) so your breakeven point is $57.33. While the stock price remains less than $50, the maximum loss on the trade is capped to the premium paid, i.e. $7.33. Profit + Breakeven line 0 ­7.33 Loss ­ 25 50 Asset price ($) 75 e