How Profit and Loss Is Calculated in Options Trading

Short answer: For an option buyer, profit equals the gain in the option's value minus the premium paid; for a seller, profit is the premium received minus any payout, with results multiplied by the lot size.

The Buyer's Side

When you buy an option, your cost is the premium paid times the lot size. You profit if the option's value rises above what you paid. For a call held to expiry, intrinsic value is the underlying price minus the strike (if positive); your net profit is that minus the premium. The maximum loss for a buyer is limited to the premium paid.

The Seller's Side

When you sell (write) an option, you receive the premium upfront. If the option expires worthless, you keep the full premium as profit. If it ends in the money, you pay the buyer the intrinsic value, and your net result is the premium received minus that payout. Sellers face limited profit but potentially large losses.

Break-Even Points

For a call buyer, break-even is the strike price plus the premium paid. For a put buyer, it is the strike price minus the premium. The underlying must move beyond break-even before the buyer actually profits, which is why direction alone is not enough.

Before Expiry

You do not have to wait for expiry; you can square off by selling what you bought (or buying back what you sold) at the current premium. Your profit or loss is simply the difference in premiums, times the lot size, minus costs.

Don't Forget Costs and Decay

Brokerage, STT, GST, and other charges reduce your net result, and time decay steadily lowers an option's premium as expiry nears. These factors can turn a seemingly correct trade into a loss.

A Worked Mindset

Always compute your break-even, maximum loss, and maximum gain before entering, and remember to multiply per-unit figures by the lot size. Knowing your full payoff profile in advance is essential to disciplined options trading.

This explainer was written by The Dispatch desk to answer a question readers commonly ask. It is general information, not personalised financial advice.