Question

Suppose a financial manager buys call options on 13,000 barrels of oil with an exercise price of $74 per barrel. She simultaneously sells a put option on 13,000 barrels of oil with the same exercise price of $74 per barrel. What are her payoffs per barrel if oil prices are $66, $70, $74, $78, and $82? (Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign.)

Answer 1

A call option buyer profits when the underlying price rises.

A put option seller also profits when the underlying rises.

When the price is $66

Call position: since the asset price is less than strike price the call option would be worthless and payoff = 0

Put position: since the asset price is less than strike price the seller of the option would have to incur a loss of (66 -74) = $8

Net loss = 0 + 8 = $ 8

When the price is $70

Call position: since the asset price is less than strike price the call option would be worthless and payoff = 0

Put position: since the asset price is less than strike price the seller of the option would have to incur a loss of (70 -74) = $4

Net loss = 0 + 4 = $ 4

When the price is $74

Call position: since the asset price equal to strike price the call option would be valued at 0 and payoff = 0

Put position: since the asset price is equal to strike price the put option would be valued at 0 and payoff = 0

Net loss = 0 + 0 = $ 0

When the price is $78

Call position: since the asset price is more than the strike price the call option would be value at difference of underlying price and strike price and payoff = 78 - 74 = $4

Put position: since the asset price is more than the strike price the option would expire worthless and payoff = $0

Net profit = 4 + 0 = 4

When the price is $82

Call position: since the asset price is more than the strike price the call option would be value at difference of underlying price and strike price and payoff = 82 - 74 = $8

Put position: since the asset price is more than the strike price the option would expire worthless and payoff = $0

Net profit = 8 + 0 = 8