Question

Problem 13-2 You own a call option on Intuit stock with a strike price of ​$35. When you purchased the​ option, it cost ​$3. The option will expire in exactly three​ months' time. a. If the stock is trading at ​$42 in three​ months, what will be the payoff of the​ call? What will be the profit of the​ call? b. If the stock is trading at ​$25 in three​ months, what will be the payoff of the​ call? What will be the profit of the​ call? c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. d. Redo​ c, but instead of showing​ payoffs, show profits. a. The payoff of the call is ​$ nothing​, and the profit of the call is ​$ nothing

Answer 1

Call option
Strike price= $35
Option Premium= $3
Time = 3 months
Payoff = Max (Market Price - Strike Price, 0)
Profit = Payoff - Option Premium
(a)
Market price of stock on exercise date is $42
Payoff = Max [ (42-35), 0]
Therefore Payoff = $7
Profit = $7- $3
Therefore Profit is $4
(b)
Market price of stock on exercise date is $25
Payoff = Max [ (25-35), 0]
Therefore Payoff = $0
Profit = $0- $3
Therefore loss of $3
( c)
Payoff Diagram
(d)
Profit/ Loss Diagram