Question

Draw the payoff picture for a short position in the put option given in the following problem----

1 Draw the payoff picture at expiration for a long position in a put option that has a premium of $3.50 and a strike price of $35.

Answer 1

For an Option holder(Long Position):

		In the Money	At the Money	Out of Money
Call Option	Right to Buy	S > K	S = K	S < K
Put Option	Right to Sell	S < K	S = K	S > K

A long put refers to buying a put option.

A short put is when a trader sells or writes a put option on a security.

Option Premium = $3.5
Strike Price = $35
Put Option - Right to Sell
Spot @ Expiry	$          15	$          20	$          30	$          35	$          40	$            50	$                    60
Long Position	In the Money	In the Money	In the Money	At the Money	Out of Money	Out of Money	Out of Money
Action	Exercise	Exercise	Exercise	-	Not Exercised	Not Exercised	Not Exercised
(a) Premium Paid	$    (3.50)	$    (3.50)	$    (3.50)	$    (3.50)	$    (3.50)	$      (3.50)	$              (3.50)
(b) Settlement	$          20	$          15	$             5	$           -	$           -	$             -	$                     -
(c) Net Payoff(a+b)	$    16.50	$    11.50	$       1.50	$    (3.50)	$    (3.50)	$      (3.50)	$              (3.50)
Short Position	In the Money	In the Money	In the Money	At the Money	Out of Money	Out of Money	Out of Money
Action	Exercise	Exercise	Exercise	-	Not Exercised	Not Exercised	Not Exercised
Premium Received	$       3.50	$       3.50	$       3.50	$       3.50	$       3.50	$         3.50	$                 3.50
Settlement	$        (20)	$        (15)	$          (5)	$           -
Net Payoff	$ (16.50)	$ (11.50)	$    (1.50)	$       3.50	$       3.50	$         3.50	$                 3.50
Spot @ Expiry	$          15	$          20	$          30	$          35	$          40	$            50	$                    60
Long - Net Payoff	$    16.50	$    11.50	$       1.50	$    (3.50)	$    (3.50)	$      (3.50)	$              (3.50)
Short - Net Payoff	$ (16.50)	$ (11.50)	$    (1.50)	$       3.50	$       3.50	$         3.50	$                 3.50