Topics Options

Profit and Loss Calculations for Call and Put Options

Beginner
Options
Jan 1, 2024

Key Takeaways:

  • The profit and loss (P&L) for an options contract involves a buy and sell order as well as trading fees to decide the net profits from the executed options contract. 

  • P&L isn’t about exercising an option, but rather the closing of a position. 

How to Determine the Profit and Loss of an Options Contract

The profit and loss of an options contract are determined when the holder decides to close the contract. The calculation is simple, involving the subtraction of the buy order and sell order at the index price, and the trading fee when the position hasn’t yet expired. 

When the options contract expires, there will be implied value resulting from volatility and time consumed. The calculation for the P&L of the option held to expiration will involve the strike price and the index price at expiration, the premium paid and the trading fees.

When an option position isn’t held to expiration but is closed early, the profit and loss calculation is very simple. Every trade involves a buy order and a sell order, so you simply subtract what you paid for the option from what you sold it for.

Types of Options Orders (European Options Contract)

There are four types of Option orders: Buy call, sell call, buy put and sell put. 

Example 1

The market price of BTC at the start of March is $54,000. Ann thinks the price of BTC will be much higher at the end of the month. Bob believes that BTC’s price will decrease.

Let’s take the following option:

  • Type: Call

  • Strike Price: $55,000

  • Expiration Date: Mar. 1, 2024

  • Underlying: BTC

 Ann buys the call option at a price of $1,000. This means that she has the right to buy 1 BTC at $45,000 when the contract matures. Bob sells call options. 

Scenario A: Upon expiration, BTC’s settlement price is $48,000. 

  • Buy Call: Ann exercises her call option and makes a $3,000 profit (i.e., $58,000 − $55,000). Minus her $1,000 premium, she walks away with a profit of $2,000.

  • Sell Call: Bob needs to fulfill his obligation to sell the option at a strike price of $45,000, and he loses $3,000 (i.e., 55,000 − $58,000). Deducting the $1,000 premium he receives, Bob’s total loss is $2,000.

Scenario B: Upon expiration, BTC’s settlement price is $43,000. 

  • Buy Call: In this case, Ann loses $1,000, which is the premium she paid for the call option.

  • Sell Call: Bob doesn’t need to perform his obligations and earns a premium of $1,000.

Example 2

Let’s say that BTC is trading for $38,000 on June 1. Based on Bob’s research, he thinks BTC’s price will drop by the end of the month. Ann thinks the price of BTC is going to rise.

We’ll take the following option:

  • Type: Put

  • Strike Price: $37,000

  • Expiration Date: May 31, 2024

  • Underlying: BTC

Bob buys a BTC put option at a price of $800. This means that Bob has the right to sell 1 BTC at $37,000 when the contract matures. Ann sells put options. 

Scenario A: Upon expiration, BTC’s settlement price is $35,000. 

  • Buy Put: Bob exercises his put option and makes a $2,000 profit (i.e., $37,000 − $35,000). Minus his $800 premium, he walks away with a profit of $1,200.

  • Sell Put: Ann needs to fulfill her obligation to sell the put option at a strike price of $35,000, so she loses $2,000 (i.e., 35,000 − $37,000). Deducting the $800 premium she receives, her total loss is $1,200.

Scenario B: Upon expiration, BTC’s settlement price is $39,000. 

  • Buy Put: In this case, Bob loses $800, which is the premium he paid for the put option.

  • Sell Put: Ann doesn’t need to perform her obligations and earns a premium of $800.

Note: The above examples have excluded the calculation for the trading fees. These are gross profits or losses.

Trading Fees Calculation

Let’s take the Bybit Options (European-style) contract as an example:

Trading fees are charged in USDC when opening or closing a position. With Bybit, maker orders and taker orders use the same fee rate. 

Maker Fee Rate

Taker Fee Rate

Options

0.02%

0.02%

Note: The trading fee for a single contract can never be higher than 12.5% of the option price.

Formula:

Trading Fee = Minimum (Taker/Maker Fee Rate × Index Price, Maximum Proportion of

Transaction in Order Price × Option Traded Price) × Option Traded Size

Let’s take Ann’s order for a call option (above) as an example:

  • Type: Call

  • Strike Price: $45,000

  • Order Size: 0.3 BTC

  • Expiration Date: Mar 1, 2024

  • Underlying: BTC

When the BTC index price is $42,000. Ann places a 0.30 BTC call option and trades it all at a price of $3,000.

In this case, Ann needs to pay a trading fee of 3.78 USDC, based on the following calculation:

Trading Fee = Minimum (0.02% × 42,000, 12.5% × 3,000) × 0.3 = 3.78 USDC

Summary

Profit and loss for options can be calculated fairly simply. However, traders tend to forget about trading and delivery fees, which can impact their final earnings or losses from an options contract. We encourage you to trade responsibly and make it a habit to practice first. Head over to Bybit Demo Trading to practice before diving into the actual product. 

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