Question

Draw the payoff picture for a short position in the call option given in the following problem: 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.

Answer 1

It's hillarious. One part of the question wants payoff picture for a short position, while the other part wants that for a long position.

Draw the payoff picture for a short position in the call option given in the following problem: 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.

What's going on?

I have therefore made the payoff picture for both the long position and the short position separately. Please pick up one as per your requirement.

Long Position:

Payoff from long position in the call option = max (S - K, 0) - C = max (S - 40, 0) - 1.75

Payoff table:

Stock price, S	Payoff
0	-1.75
10	-1.75
20	-1.75
30	-1.75
40	-1.75
50	8.25
60	18.25
70	28.25
80	38.25
90	48.25
100	58.25
110	68.25
120	78.25
130	88.25
140	98.25
150	108.25

And the payoff picture:

Short Position:

Payoff from short position in the call option = C - max (S - K, 0) = 1.75 - max (S - 40, 0)

Payoff table:

Stock price, S	Payoff
0	1.75
10	1.75
20	1.75
30	1.75
40	1.75
50	-8.25
60	-18.25
70	-28.25
80	-38.25
90	-48.25
100	-58.25
110	-68.25
120	-78.25
130	-88.25
140	-98.25
150	-108.25

and the payoff picture is: