12  •   The Intelligent Option Investor
Visual Representation of Call Options
In a similar way that we created a diagram of the risk-reward profile of owner-
ship in a common stock, a nice way of understanding how options work is to 
look at a visual representation. The following diagram represents a call option.
There are a few things to note about this representation:
5/18/2012
-
20
40
60
80
100
120
140
160
180
200
5/20/2013 249 499
Date/Day Count
Stock Price
749 999
GREEN
1. The shaded area (green) represents the price and time range over 
which the investor has economic exposure—I term this the range 
of exposure. Because we are talking about call options, and because 
call options deal with the upside potential of a stock, you see that 
the range of exposure lies higher than the present stock price 
(remember, “Call up”). 
2. True to one of the defining characteristics of an option mentioned 
earlier, our range of exposure is limited by time; the option pictured 
in the preceding figure expires 500 days in the future, after which 
we have no economic exposure to the stock’s upside potential. 
3. The present stock price is $50 per share, but our upside exposure only 
begins at $60 per share. The price at which economic exposure begins 
is called the strike price of an option. In this case, the strike price is 
$60 per share, but we could have picked a strike price at the market price 
of the stock, further above the market price of the stock (e.g., a strike 
price of $75), or even below the market price of the stock. We will inves-
tigate optimal strike prices for certain option strategies later in this book.