# Writing a Call option: Graphic presentation

## Graphic presentation of the profit (loss) on date B.

Graph 3 shows us the profit or loss arising on Date B from writing a “100K C H” option.

We received \$10K for the option.

Graph A shows what our gross loss will be from the writing of a Call option at any level of price in the market for houses on Date B. Graph A does not rise above the \$0 line, which means that if you do not receive a premium, you are bound to make a loss.

Graph B shows us what our profit or loss  will be on the transaction (net profit), at the same price levels on Date B.

For example:

Point B2, shows a loss of \$20K on the transaction, if house prices are at \$130K.

Explanation: If the purchaser wants to exercise the option, we will be forced to buy the house in the market for \$130K and to sell it to the option holder for \$100K, the exercise price.

The loss on the option: -\$30K = \$100K – \$130K.

The loss on the transaction: – \$20K = -\$30K + \$10K.

Point B1 shows a profit of \$10K on the transaction, if house prices are at \$100K.

At any price below \$100K (leftwards from Point B1) we continue making \$10K, in other words there is no way to make a profit of more than \$10K, which is the amount of the premium.

From B1 rightwards, any \$1K increase in prices draws us down by \$1K.

At Point BC we are “balanced”. Any additional increase of \$1K in the price of houses results in a loss of the same amount. As house prices increase above the break-even point, so the loss increases!