For ease of explanation, we will define two terms used in calculating the profit (or loss) on options:
- Gross profit is the profit from exercising the option only – the result does not take into account the premium (as if we received the option free of charge).
- Net profit is the profit on the transaction as a whole – the result takes into account the premium, and thus reflects the net profit (or loss) on the transaction.
These terms will be clarified later on.
Dates in the Examples
In the following chapter we will relate mainly to two dates:
Date A – date of purchase of the option.
Date B – date of expiry of the option.
Any date between these two dates will be stated as Date A1, and if necessary Date A2 etc.
Take another little break and to watch a short video which talks about time value and options.