In the case of a call option, it is the amount that results from subtracting the strike price and the premium paid to acquire the option from the underlying’s price. In other words:
net payoff = market price of underlying – (strike price+ premium)
For example, if the market price of a share underlying a call option is $110, whilst it was purchased for $7 with a strike price of $90, then:
net payoff = 110 – (90 + 7) = $13
For a put option, it is the amount that results from subtracting the underlying’s price and the premium paid to acquired the option from the strike price. That is:
net payoff = strike price – (market price of underlying + premium)
Suppose the market price of a security underlying a put option is $40, whilst it was bought for $5 with a strike price of $50, then:
net payoff = 50 – (40 + 5) = $5
