1 Draw the payoff picture at expiration for a long position in a call option that...

1 Draw the payoff picture at expiration for a long position in a call option that has a premium of $1.75 and a strike price of $40.

1a Draw the payoff picture for a short position in the call option given in Problem 2.

Expert Solution

1. Long call option payoff diagram.

Long call payoff = max(St - X, 0)

X = $40

Note that we do not need the premium to calculate the payoff of options.

Profit = max(St - X, 0) - Premium

Screenshot with formulas

2. Short call option payoff

Short call payoff = -max(St - X, 0)

Short call profit = -max(St - X, 0) + Premium

jeff jeffy answered 2 years ago

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