Now let's add the time value back in and look at the cost breakdown if we exercise the option:
We Pay: $3.50 for the call option (here we're paying $1.00 more because we've added the time value back into the price of the option)
We Pay: $35 for the stock when we exercise the call option (because $35 is the strike price of the option)
Total Cost (break-even point): $3.50 + $35 = $38.50 to acquire a stock that is trading for $37.50.
To purchase this option, we paid a $1.00 premium over the current XYZ stock price. If we plan to exercise this option, we have to offset the extra $1.00 in cost. This is why we need the stock price to rise another $1.00 to $38.50. When the stock price hits $38.50, we could exercise the call option, get the stock for $35 per share, and then sell it immediately for the market price of $38.50. That would let us break-even. To profit, the stock price would have to go above $38.50.
