This payoff diagram represents the outcomes that may be experienced through a long call option position given various different outcomes for the underlying stock price at expiration.

The payoff diagram takes into account both the premium and the outcome if the option is exercised. For this example, a European stock option will be used, which has a strike price of $100 and a premium of $3. If the underlying stock price is below $100 at expiration, the option will be abandoned by the long call option position. Since there is no benefit in paying $100 to buy the underlying asset as they are allowed to under the terms of the option contract if the market price of that stock is less than 100. So if the underlying asset is below 100, the option will be abandoned, it will not be used by the option owner, but the long call option position will still have paid the $3 premium to buy the option in the first place and, therefore, will suffer a $3 loss. If the underlying asset ends up above 100 on the expiration date, then it'll make sense for the option owner to exercise their option or to use it to pay the $100 to the other side of the option contract and take delivery of the underlying asset that is worth more than 100, making for themselves a gain at expiration. This is represented by the 45° upward sloping line to the right-hand side of the diagram. It's a 45° line because, for every $1 that the underlying asset is above 100, the option owner makes $1 extra profit. The breakeven point on the diagram, where this payoff line crosses the horizontal axis, is at $103. At 103, the option will be exercised by the option owner since it makes sense to pay $100 to buy an asset worth 103, making a gain on expiration of $3, which will net off exactly with the premium previously paid of $3. Looking at the opposite side of the same trade, the short call position, the example, we used the same option as before, the European stock option with a strike price of $100 and a premium of 3.

This call option was sold by the short call position and earned, for the option seller, $3 of premium. If the option is abandoned by the option holder, then the $3 premium is retained by the option seller. It's important to note that the short position has no influence over whether the option is abandoned or exercised, they simply have to go along with the decision of the option owner. So if the underlying asset is below 100, the option is abandoned, but the short call position retains the $3 premium, making a profit of $3. If the underlying asset at expiration is above 100, the option owner will choose to exercise it and the short position will be obligated to deliver the underlying asset that is worth more than 100 but only receive the 100 strike price for it, suffering a loss. The breakeven point for the short call position in this example is at $103. So if the underlying stock is priced at $103 on the expiration date, the option owner will choose to exercise it, the short call position will be obligated to deliver the underlying asset that is worth 103 but will only receive the $100 strike price for it, suffering a $3 loss at expiration. But offsetting that against the $3 premium previously received, they'll have a zero net gain or loss.