Question

Esso stock sells for some value X. A six month call option on Esso sells for some value X. The interest rate is 3%. A six-month call option at 68 sells for 7.415, while a six month put option at 68 sells for 4.403. You can buy or sell 500 of any asset. Graph your expected profits as X goes from 64 to 73.

Please explain the functions that you use to graph.

Answer 1

We are choosing to buy 500 call options here. The payoff will look like:

X	Payoff	Payoff x 500
64	-7.415	-3707.5
64.2	-7.415	-3707.5
64.4	-7.415	-3707.5
64.6	-7.415	-3707.5
64.8	-7.415	-3707.5
65	-7.415	-3707.5
65.2	-7.415	-3707.5
65.4	-7.415	-3707.5
65.6	-7.415	-3707.5
65.8	-7.415	-3707.5
66	-7.415	-3707.5
66.2	-7.415	-3707.5
66.4	-7.415	-3707.5
66.6	-7.415	-3707.5
66.8	-7.415	-3707.5
67	-7.415	-3707.5
67.2	-7.415	-3707.5
67.4	-7.415	-3707.5
67.6	-7.415	-3707.5
67.8	-7.415	-3707.5
68	-7.415	-3707.5
68.2	-7.215	-3607.5
68.4	-7.015	-3507.5
68.6	-6.815	-3407.5
68.8	-6.615	-3307.5
69	-6.415	-3207.5
69.2	-6.215	-3107.5
69.4	-6.015	-3007.5
69.6	-5.815	-2907.5
69.8	-5.615	-2807.5
70	-5.415	-2707.5
70.2	-5.215	-2607.5
70.4	-5.015	-2507.5
70.6	-4.815	-2407.5
70.8	-4.615	-2307.5
71	-4.415	-2207.5
71.2	-4.215	-2107.5
71.4	-4.015	-2007.5
71.6	-3.815	-1907.5
71.8	-3.615	-1807.5
72	-3.415	-1707.5
72.2	-3.215	-1607.5
72.4	-3.015	-1507.5
72.6	-2.815	-1407.5
72.8	-2.615	-1307.5
73	-2.415	-1207.5
73.2	-2.215	-1107.5
73.4	-2.015	-1007.5
73.6	-1.815	-907.5
73.8	-1.615	-807.5
74	-1.415	-707.5
74.2	-1.215	-607.5
74.4	-1.015	-507.5
74.6	-0.815	-407.5
74.8	-0.615	-307.5
75	-0.415	-207.5
75.2	-0.215	-107.5
75.4	-0.015	-7.5
75.6	0.185	92.5
75.8	0.385	192.5
76	0.585	292.5
76.2	0.785	392.5
76.4	0.985	492.5
76.6	1.185	592.5
76.8	1.385	692.5
77	1.585	792.5
77.2	1.785	892.5
77.4	1.985	992.5
77.6	2.185	1092.5
77.8	2.385	1192.5
78	2.585	1292.5
78.2	2.785	1392.5

And the graph will look like:

Here, payoff was the payoff for a single option. Since we have bought 500 call options, we have multiplied it by 500. The formula used for the payoff column is =MAX(X-68,0)-7.415. X has been varied over a range of values and 7.415 represents the call price.