Question

You long a call option with a strike price of K. The underlying asset price on expiration date is S. What is your payoff?

Group of answer choices

S - K if S > K, but zero otherwise.

K - S if K > S, but zero otherwise.

0

S - K

You short a call option with a strike price of K. The underlying asset price on expiration date is S. What is your payoff?

Group of answer choices

K - S if S > K, and zero otherwise.

K - S

0

S - K if S > K, and zero otherwise.

You long a put option with strike K. The underlying price at expiration is S. What's your payoff?

Group of answer choices

K - S if K > S, and zero otherwise.

K - S

S - K

0

Answer 1

1. Answer is: S - K if S > K, but zero otherwise.

A long call option gives its buyer a right but not an obligation to purchase the underlying at strike price at the expiration from the seller of the option. the settlement of option is done by paying cash if buyer has positive payoff.

buyer of the option will get a payoff if price of underlying at expiration is higher than strike price. this is because buyer will buy the underlying from seller of the option at lower strike price and then sell it in the market at higher price. if price of underlying at expiration is lower than strike price then buyer of the option will let it expire worthless and his payoff will be zero.

2. Answer is: K - S if S > K, and zero otherwise.

if price of underlying at expiration is higher than strike price then buyer of the option will exercise the option and seller will have to pay the buyer the difference of S - K. seller's payoff will be negative of difference of S - K or K - S.

if price of underlying at expiration is lower than strike price then buyer of the option will let it expire worthless and his payoff will be zero. seller's payoff will also be zero.

3. Answer is: K - S if K > S, and zero otherwise.

A long put option gives its buyer a right but not an obligation to sell the underlying at strike price at the expiration to the seller of the option. the settlement of option is done by paying cash if buyer has positive payoff.

buyer of the option will get a payoff if price of underlying at expiration is lower than strike price. this is because buyer will sell the underlying to the seller of the option at higher strike price after purchasing it from the market at lower price. if price of underlying at expiration is higher than strike price then buyer of the option will let it expire worthless and his payoff will be zero.