Updated for the 2026-2027 CFA® Level I curriculum.
An option payoff is what a position is worth at expiration. Profit is the payoff adjusted for the premium paid or received when the position was opened. CFA Level I tests both, plus the ability to tell them apart under exam pressure. After reviewing this note, you should be able to calculate the expiration payoff and profit for a long or short call and a long or short put.
Quick Answer
An option payoff at expiration depends only on the stock price and the strike price . A long call pays . A long put pays . Short positions pay the negative of the long payoff. Profit equals payoff minus premium paid (long positions) or premium received minus payoff (short positions). Payoff ignores the premium. Profit does not.
Key Takeaways About Call and Put Option Payoffs and Profits
Payoff is value at expiration based only on and . Profit subtracts or adds the premium.
Long call payoff: . Short call payoff: the mirror image, .
Long put payoff: . Short put payoff: .
A long position's maximum loss is the premium paid. A short call's maximum loss is theoretically unlimited.
Breakeven price is where profit equals zero, not where payoff equals zero.
A common error is applying the same payoff formula to both the long and short side of a trade.
Payoff diagrams plot profit (not raw payoff) on the y-axis against on the x-axis in most CFA materials.
What You Need to Know for CFA Level I
Calculate the expiration payoff for a long call, short call, long put, and short put given and .
Convert any payoff into profit by adding or subtracting the premium correctly.
Identify the breakeven stock price for each of the four positions.
Read a payoff diagram and match its shape to the correct option position.
Explain why the writer (seller) of an option has the mirror-image payoff of the buyer.
Recognize that payoff is never negative for a long option position, but profit can be.
Option Payoff vs Option Profit
Payoff and profit answer different questions. Payoff answers "what is this option worth right now, at expiration?" Profit answers "did this trade make or lose money overall?"
Payoff uses only two inputs: the stock price at expiration and the strike price . Profit takes that payoff and adjusts for the premium that changed hands when the option was purchased or sold.
For a buyer (long position), profit is lower than payoff because the buyer paid a premium upfront:
For a seller (short position), profit is higher than the negative payoff because the seller collected a premium upfront:
Where:
= price of the underlying asset at expiration
= exercise (strike) price
= call option premium paid by the long position or received by the short position at initiation
= put option premium paid by the long position or received by the short position at initiation
= the greater of a or b
= option value at expiration before accounting for the premium
= payoff adjusted for the premium paid or received
This distinction drives most of the exam questions on this LOS. A question that asks for "value at expiration" wants payoff. A question that asks "what is the trader's profit" wants payoff adjusted for premium.
Long Call Payoff and Profit
A long call gives the holder the right to buy the underlying at the strike price. The holder exercises only if the stock price at expiration exceeds the strike.
Where is the stock price at expiration, is the strike price, and is the call premium paid at initiation.
The payoff can never be negative. It is either zero or the amount by which the stock price exceeds the strike. Profit can be negative, and the maximum loss is limited to the premium paid.
Short Call Payoff and Profit
The call writer takes the opposite side. If the holder exercises, the writer must deliver the stock at the strike price, giving up the upside.
The short call payoff is never positive. The most a writer can gain is the premium received, when the option expires worthless . Losses grow without limit as rises, since there is no cap on how high the stock price can go.
Long Put Payoff and Profit
A long put gives the holder the right to sell the underlying at the strike price. The holder exercises only if the stock price at expiration is below the strike.
Where is the put premium paid at initiation. The payoff is capped at (if the stock price falls to zero) and floored at zero. The maximum loss on the position is the premium paid.
Short Put Payoff and Profit
The put writer must buy the underlying at the strike price if the holder exercises.
The most a put writer can gain is the premium received, when . The maximum loss occurs if the stock price falls to zero, at which point the writer loses minus the premium collected.
Breakeven Prices
Breakeven is the stock price at which profit equals exactly zero. It is not the strike price, except by coincidence.
Position | Breakeven Price |
|---|---|
Long call | |
Short call | |
Long put | |
Short put |
Notice that the long and short side of the same option type share the same breakeven price. They just make money on opposite sides of it.
How to Read Option Payoff Diagrams
A payoff diagram plots profit on the vertical axis against the stock price at expiration on the horizontal axis. Four shapes appear repeatedly at Level I:
Long call: flat line at until , then rises one-for-one with .
Short call: flat line at until , then falls one-for-one as rises.
Long put: rises as falls below , capped profit at , flat at above .
Short put: falls as falls below , flat at above .
Long positions have a kink that bends upward from a flat floor. Short positions have a kink that bends downward from a flat ceiling. If a diagram shows unlimited upside, it is a long call. If it shows unlimited downside, it is a short call.
Worked Example
A stock trades at $50. An investor buys a call and a put, both with a strike price of $50. The call premium is $3. The put premium is $2. A second investor sells the same call and the same put. Calculate payoff and profit for each position at three expiration prices: = $45, $50, and $58.
Long call
Payoff | Profit (Payoff − 3) | |
|---|---|---|
45 | 0 − 3 = −3 | |
50 | 0 − 3 = −3 | |
58 | 8 − 3 = 5 |
Short call
Payoff | Profit (3 − Payoff owed) | |
|---|---|---|
45 | 0 | 3 − 0 = 3 |
50 | 0 | 3 − 0 = 3 |
58 | −8 | 3 − 8 = −5 |
Long put
Payoff | Profit (Payoff − 2) | |
|---|---|---|
45 | 5 − 2 = 3 | |
50 | 0 | 0 − 2 = −2 |
58 | 0 | 0 − 2 = −2 |
Short put
Payoff | Profit (2 − Payoff owed) | |
|---|---|---|
45 | −5 | 2 − 5 = −3 |
50 | 0 | 2 − 0 = 2 |
58 | 0 | 2 − 0 = 2 |
At = $58, the call buyer profits ($5) at the call seller's expense (−$5). At = $45, the put buyer profits ($3) at the put seller's expense (−$3).
At = $50, both options expire worthless and only the two premiums change hands. Every dollar one side gains, the other side loses. That symmetry is a direct check on your arithmetic.
Common Exam Traps
Using payoff and profit interchangeably. A question asking for "value at expiration" wants the payoff formula only. Adding or subtracting the premium when the question did not ask for profit produces the wrong answer.
Forgetting the option premium in profit. Payoff is only half the profit calculation. Skipping the premium adjustment is the single most common arithmetic error on this LOS.
Giving a short option the same payoff sign as the long option. The short side of any option position is the mirror image of the long side. A short call payoff is never positive; a short put payoff is never positive either.
Using current spot price instead of expiration price. Expiration payoff depends on , the price at expiration, not the stock's price today. Using today's price produces a payoff that has no meaning for this LOS.
Practice Questions
An investor sells (writes) a put option with a strike price of $40 for a premium of $2.50. At expiration, the underlying stock closes at $36. What is the investor's profit on this position?
−$1.50
−$4.00
$1.50
Correct Answer: A
The writer collected $2.50 upfront but owes $4.00 at expiration because the stock fell below the strike. Net profit is a loss of $1.50.
Option B: −$4.00 is the payoff owed, calculated correctly, but it ignores the $2.50 premium the writer already collected.
Option C: $1.50 reverses the sign. This answer treats the position as a long put or adds the premium instead of netting it against the payoff owed.
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FAQs About Call and Put Option Payoffs and Profits
Is option payoff the same as option value?
At expiration, yes. Before expiration, an option's value includes time value in addition to the payoff-equivalent intrinsic value. This note covers only value at expiration, where value and payoff are the same thing.
Can payoff ever be negative?
No. Payoff for a long call or long put is bounded at zero on the downside. Only the short side of a position can show a negative payoff, since it owes money to the counterparty.
Why do the long and short breakeven prices match?
Breakeven depends only on the strike price and the premium, and both parties agree to the same strike and the same premium in the same contract. They just sit on opposite sides of that price.