Let's say we are going to buy the XYZ Jan 35 Call option depicted in the graph to the right. The graph tells us the following:
We Pay: $2.50 for the call option (in this example, we are excluding the time value.)
We Pay: $35 for the stock when we exercise the call option (because $35 is the strike price of the option)
Thus, our total cost (break-even point) is: $2.50 + $35 = $37.50 to acquire a stock that is trading for $37.50.
Here in example 1, we did not consider the impact of the option's time value. As a result, our total cost to acquire the stock by exercising the option is equal to the current market price of the stock. We got the power of owning the option without paying anything extra for it. In reality, however, to get the rights and leverage provided by an option, we will have to pay a premium. That's where time value comes in. See Exercise, part II.
