Profit and Loss Calculations for Combined Positions
Now that you know the economics of individual positions, let's combine them. The Series 7 expects you to calculate profit and loss for stock-and-option combinations using the T-chart method, a systematic approach that prevents errors.
The T-Chart Method
The T-chart (debit/credit method) is the standard approach for calculating options profit and loss on the Series 7:
| Money Out (Debits) | Money In (Credits) |
|---|---|
| Premiums paid | Premiums received |
| Stock purchases | Stock sales |
| Exercise costs (buying) | Exercise proceeds (selling) |
Profit or Loss = Money In - Money Out
- If Money In > Money Out = Profit
- If Money Out > Money In = Loss
Remember: Options contracts represent 100 shares, so multiply per-share calculations by 100 for total dollar amounts.
Covered Call P&L Examples
Setup: Buy stock at $50, sell a 50 call for $3
Scenario 1: Stock stays at $50 (call expires worthless)
| Money Out | Money In |
|---|---|
| $50 (stock purchase) | $50 (stock value) |
| $3 (premium received) | |
| Total: $50 | Total: $53 |
Result: $53 - $50 = $3 profit
Scenario 2: Stock rises to $60 (call is exercised)
| Money Out | Money In |
|---|---|
| $50 (stock purchase) | $50 (stock sold at strike) |
| $3 (premium received) | |
| Total: $50 | Total: $53 |
Result: $53 - $50 = $3 profit (gain capped; missed $10 upside beyond strike)
Exam Tip: Gotchas
- A covered call writer's gain is capped. Even if the stock doubles, the shares are called away at the strike price. The writer keeps only the premium above the stock purchase price.
- When a call is exercised, the writer sells at the STRIKE price, not the market price. The T-chart always uses the strike for the exercise transaction.
Scenario 3: Stock falls to $40 (call expires worthless)
| Money Out | Money In |
|---|---|
| $50 (stock purchase) | $40 (stock value) |
| $3 (premium received) | |
| Total: $50 | Total: $43 |
Result: $43 - $50 = $7 loss
Protective Put P&L Examples
Setup: Buy stock at $50, buy a 50 put for $2
Scenario 1: Stock rises to $60 (put expires worthless)
| Money Out | Money In |
|---|---|
| $50 (stock purchase) | $60 (stock value) |
| $2 (premium paid) | |
| Total: $52 | Total: $60 |
Result: $60 - $52 = $8 profit
Scenario 2: Stock falls to $40 (put is exercised)
| Money Out | Money In |
|---|---|
| $50 (stock purchase) | $50 (stock sold at strike) |
| $2 (premium paid) | |
| Total: $52 | Total: $50 |
Result: $50 - $52 = $2 loss (maximum loss)
Scenario 3: Stock falls to $0 (put is exercised)
| Money Out | Money In |
|---|---|
| $50 (stock purchase) | $50 (stock sold at strike) |
| $2 (premium paid) | |
| Total: $52 | Total: $50 |
Result: $50 - $52 = $2 loss (same maximum loss: the put guarantees sale at $50)
Exam Tip: Gotchas
- When a put is exercised, the holder sells at the STRIKE price, not the market price. This is why the protective put limits loss regardless of how far the stock falls.
- The premium is always a cost for the protective put holder. It reduces profit on the upside and defines the maximum loss on the downside.
Key Calculation Patterns
- For any combined stock-and-option position, always account for the stock cost/proceeds AND the option premium
- When a call is exercised against a covered writer, the writer delivers stock at the strike price and keeps the premium
- When a put is exercised by a protective put holder, the holder sells stock at the strike price but has already paid the premium
- The premium is always part of the equation: it is a debit for buyers and a credit for sellers
Practice Framework
When the exam gives you a combined position scenario, follow these steps:
- Identify all money out (debits): stock purchases + premiums paid
- Identify all money in (credits): stock sales + premiums received + exercise proceeds
- Subtract: Money In - Money Out = Profit or Loss
- Check: Does the answer match the max gain/max loss formulas?
Think of it this way: The T-chart is like a personal ledger. Every dollar you spend goes on the left, every dollar you receive goes on the right. When you are done, subtract left from right. Positive means profit, negative means loss. The premium always appears in the ledger, whether the option is exercised or expires worthless.
Exam Tip: Gotchas
- The premium is always part of the equation. A common mistake is forgetting the premium when the option expires worthless. The buyer still paid it; the seller still received it.
- Multiply per-share amounts by 100. The exam may give you per-share numbers, but answer choices are often in total-contract dollars.