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Understanding Call Options: Calculating Premium & Exercising

A call is one of the two basic types of options; the other type is a put. Purchasing a call gives the buyer the option to buy shares at a price listed in the option agreement. This price is known as the strike price. If the price of the underlying stock goes above the strike price, the option is said to be "in the money." The cost of purchasing the option is known as the call premium.

For an Exercised Option

Step 1

Determine the strike price on the call option. This will be listed along with the rest of the information on the option agreement.

Step 2

Determine the price of the underlying stock on the exercise date. This does not have to be the date of expiration unless it was a European bond.

Step 3

Calculate the difference between the strike price and the price of the underlying stock on the date the option was exercised. This number should be calculated on a per-share basis. This value will always be positive; a rational investor will never exercise a call option unless the price of the underlying stock exceeds the strike price.

Step 4

Calculate the profit made per share.

Step 5

Subtract the profit made per share from the difference between the strike price and the stock price when the option was exercised. This is equal to the premium, per share, paid for the call option.

For an Option That Was Resold

Step 1

Determine the premium that was collected through reselling the option.

Step 2

Find the net profit made on the option.

Step 3

Subtract the net profit from the premium collected through selling the option. This difference is equal to the premium initially paid to acquire the option.