Option Math

Options Math — Calculations and Worked Examples ## Why Options Math Matters The Series 7 exam tests not just conceptual understanding but also your ability to calculate breakevens, intrinsic value, time value, and profit/loss. These calculations follow consistent formulas. Master the patterns, and any options math question becomes straightforward. The key principle: always start from the breakeven, then ask "which direction does this position profit?" --- ## The Four Basic Positions — Complete Formula Reference ### Long Call - Breakeven: Strike Price + Premium Paid - Intrinsic Value at Expiration: Max(Stock Price − Strike, 0) - Profit/Loss: Intrinsic Value − Premium Paid - Maximum Gain: Unlimited - Maximum Loss: Premium Paid ### Short Call - Breakeven: Strike Price + Premium Received (same as long call buyer's breakeven) - Profit/Loss: Premium Received − Intrinsic Value - Maximum Gain: Premium Received - Maximum Loss: Unlimited ### Long Put - Breakeven: Strike Price − Premium Paid - Intrinsic Value at Expiration: Max(Strike − Stock Price, 0) - Profit/Loss: Intrinsic Value − Premium Paid - Maximum Gain: Strike Price − Premium Paid (stock can only fall to zero) - Maximum Loss: Premium Paid ### Short Put - Breakeven: Strike Price − Premium Received (same as long put buyer's breakeven) - Profit/Loss: Premium Received − Intrinsic Value - Maximum Gain: Premium Received - Maximum Loss: Strike Price − Premium Received --- ## Intrinsic Value and Time Value — Formula Drill ### Intrinsic Value The immediately exercisable value of an option. It is never negative. `` Call Intrinsic Value = Max(Stock Price − Strike Price, 0) Put Intrinsic Value = Max(Strike Price − Stock Price, 0) `` - In-the-money options have positive intrinsic value -…