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1. Identify the Option Type: Determine if you are dealing with a call option (right to buy) or a put option (right to sell).
2. Gather Key Information:
o Strike Price: The price at which the option can be exercised.
o Premium Paid: The cost of purchasing the option.
o Current Price of the Underlying Asset: The market price of the stock or asset.
3. Calculate Intrinsic Value:
o For Call Options:
Intrinsic Value=max(0,Current Price−Strike Price)
o For Put Options:
Intrinsic Value=max(0,Strike Price−Current Price)
4. Determine Time Value: This is the portion of the option’s price that exceeds its intrinsic value, reflecting the potential for the option to gain value before expiration.
5. Calculate Breakeven Point:
o For Call Options:
Breakeven=Strike Price+Premium Paid
o For Put Options:
Breakeven=Strike Price−Premium Paid
6. Calculate Potential Profit or Loss:
o Profit:
Profit=(Stock Price at Expiration−Strike Price−Premium Paid)×100×Number of Contracts
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