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Inspect the unfloored difference
A long call with strike 100 evaluated at S=80 has S−K=−20. The holder payoff is max(−20,0)=0, not −20. Paying premium 6 makes simple holder profit −6 in this scenario.
Keep three layers in order
First form the nonnegative contract holder payoff. Next apply long or short sign to obtain position settlement. Finally add the signed premium for simple profit. Combining these steps casually can move a loss into the wrong layer.
| Layer | Amount |
|---|---|
| Holder call payoff | 0 |
| Long position settlement | 0 |
| Paid premium | −6 |
| Simple long profit | −6 |
Do not floor every signed position amount
A writer’s settlement can be negative when the holder payoff is positive. Flooring the writer’s negative amount at zero would erase the contract obligation. The floor belongs inside the holder payoff expression.
Check the expected domain
These examples concern standard nonnegative vanilla holder payoff at expiry. A forward settlement can be signed and uses another function. Do not transfer the option floor to every derivative payoff.