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Mastering pandas for Finance by Michael Heydt

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Profit and loss calculation

The general idea with an option is that you want to make a profit on speculation on the movement of the price of a security in the market, over a predetermined time frame.

The amount of profit or loss from the option can be calculated using a combination of the upfront premium and the payoff value of the option upon expiration. It is a zero-sum game as when a buyer profits by a certain amount, the seller loses the same amount, and vice versa.

The following table summarizes all of the profit and loss situations for both the buyer and seller when entering into options contracts:

Type

Scenario

Buyer or seller

Net profit or loss

Cash flow

At the end of the window period

Net amount

Call

The maturity price is above ...

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