Question

In: Finance

4. If you buy a call option of Amazon Inc. with an exercise price of $2000...

4.

If you buy a call option of Amazon Inc. with an exercise price of $2000 for a premium of $210.

Draw payoff and profit of call option buyer and call option writer at expiration date graphically.

(use a ruler and draw it by hand if it is hard for you to do it on your computer)

Solutions

Expert Solution

Payoff of Call option buyer = max (S - K, 0)

Profit of the call option buyer = max (S - K, 0) - C

Payoff for the call option writer = - max (S - K, 0)

and Profit of the call option write = C - max (S - K, 0)

S = Stock price on expiration date, K = Strike price = $ 2,000; C = Call premium = $ 210

I have produced below the payoff and profit table. The graph follows the table.

Stock Price, S Payoff of buyer Profit of Buyer Payoff of writer Profit of Writer
max (S - 2000, 0) max (S - 2000, 0) - 210 '-max (S - 2000, 0) C - max (S - 2000, 0)
0 0 -210 0 210
100 0 -210 0 210
200 0 -210 0 210
300 0 -210 0 210
400 0 -210 0 210
500 0 -210 0 210
600 0 -210 0 210
700 0 -210 0 210
800 0 -210 0 210
900 0 -210 0 210
1000 0 -210 0 210
1100 0 -210 0 210
1200 0 -210 0 210
1300 0 -210 0 210
1400 0 -210 0 210
1500 0 -210 0 210
1600 0 -210 0 210
1700 0 -210 0 210
1800 0 -210 0 210
1900 0 -210 0 210
2000 0 -210 0 210
2100 100 -110 -100 110
2200 200 -10 -200 10
2300 300 90 -300 -90
2400 400 190 -400 -190
2500 500 290 -500 -290
2600 600 390 -600 -390
2700 700 490 -700 -490
2800 800 590 -800 -590
2900 900 690 -900 -690
3000 1000 790 -1000 -790
3100 1100 890 -1100 -890
3200 1200 990 -1200 -990
3300 1300 1090 -1300 -1090
3400 1400 1190 -1400 -1190
3500 1500 1290 -1500 -1290
3600 1600 1390 -1600 -1390
3700 1700 1490 -1700 -1490
3800 1800 1590 -1800 -1590


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