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Finance · level 2

Option payoffs and parity

A call pays what the share exceeds the strike, minus what you paid. Breakeven is strike plus premium; put-call parity ties the whole set together.

Theory: Derivatives & Pricing

Worked example: Call struck at 50, premium 8. Breakeven share price?

intrinsic5
premium8
breakeven58
answer58

Step by step

  1. 1

    Intrinsic value

    max(55 − 50, 0) = 5

  2. 2

    Less the premium paid

    5 − 8 = -3

  3. 3

    Breakeven

    strike + premium = 58

  4. 4

    Put-call parity

    C − P = S − PV(K)

    Any three of the four prices pin down the fourth.

Call struck at 50, premium 8. Breakeven share price? = 58

The theory behind it

Intuition

An option payoff is asymmetric: intrinsic value at expiry plus zero downside beyond the premium. Put-call parity ties the four pieces together.

Common pitfalls

  • ×Forgetting the premium when computing break-even.
  • ×Mixing up which side is long when reading a payoff diagram.

In the interview

Risk-transfer and hedging discussions.