Options profit and loss formula


It is very easy, because Excel has the MAX function, which takes a set of values separated with commas and returns the greatest of them. In our example, the formula in cell C8 will be:. With the inputs in our example 45 and 49 , cell C8 should now be showing 4. You can test different values for the underlying price input and see how the formula works.

For any underlying price smaller than or equal to 45 it should return zero; for values greater than 45 it should return the difference between cells C6 and C4.

This is again very simple to do — we will just subtract cell C5 from the result in cell C8. The entire formula in C8 becomes:. Cell C8 should now be showing 1. You can again test different input values.

For put options the logic and formula is almost the same, with just one little difference: The put option profit or loss formula in cell G8 is:. Now we have created simple payoff calculators for call and put options.

However, there are still some things we can improve or add to make our spreadsheet more useful. Furthermore, our calculator only shows profit or loss per share, while many people are actually more interested in total dollar profit or loss, especially when working with positions of multiple option contracts. Therefore, we should improve our calculations to also consider direction long or short , position size number of contracts and contract size number of shares represented by one option contract.

We will merge our call and put calculations in the next part of the tutorial. Initial cash flow is constant — the same under all scenarios. It is a product of three things:. Of course, with a long call position the initial cash flow is negative, as you are buying the options in the beginning. The second component of a call option payoff, cash flow at expiration, varies depending on underlying price. That said, it is actually quite simple and you can construct it from the scenarios discussed above.

If underlying price is below than or equal to strike price, the cash flow at expiration is always zero, as you just let the option expire and do nothing. If underlying price is above the strike price, you exercise the option and you can immediately sell it on the market at the current underlying price. Therefore the cash flow is the difference between underlying price and strike price, times number of shares. Putting all the scenarios together, we can say that the cash flow at expiration is equal to the greater of:.

It is the same formula. The screenshot below illustrates call option payoff calculation in Excel. Besides the MAX function, which is very simple, it is all basic arithmetics. One other thing you may want to calculate is the exact underlying price where your long call position starts to be profitable. If you don't agree with any part of this Agreement, please leave the website now. All information is for educational purposes only and may be inaccurate, incomplete, outdated or plain wrong.

In the above example you can identify several inputs that our payoff formula will take — they are the numbers we already know:. In an Excel spreadsheet, we first need to set up three cells where we will enter the inputs, and another cell which will show the output.

I have decided to enter the strike, initial price and underlying price inputs in cells C4, C5, C6, respectively. The result will be shown in cell C8. While not necessary for a simple calculation like this one, it is a good idea to somehow graphically differentiate input and output cells, especially when you are building a more complex spreadsheet. It will make the sheet much easier to use and reduce the risk of you or someone else accidentally overwriting your formulas in the future.

It is best to do this consistently across all your spreadsheets. Personally, I always make the background of input cells where user is expected to enter values yellow and the output cells which typically contain formulas and should not be overwritten green — just my habit, you can of course use different colors, fonts, borders, or other formatting.

Now we have the cells ready and we can build the formula in cell C8, which will use the inputs in the other cells to calculate profit or loss. In general, call option value not profit or loss at expiration at a given underlying price is equal to the greater of:. Now we need to implement this formula in Excel. It is very easy, because Excel has the MAX function, which takes a set of values separated with commas and returns the greatest of them.

In our example, the formula in cell C8 will be:. With the inputs in our example 45 and 49 , cell C8 should now be showing 4. You can test different values for the underlying price input and see how the formula works. For any underlying price smaller than or equal to 45 it should return zero; for values greater than 45 it should return the difference between cells C6 and C4.