Question

6. Describe the payoff for the following options at expiration of the option(s):

a. an owned call option on 50 units of the underlying asset with a strike price of 50.

b. a written put option on 100 units of the underlying asset with a strike price of 40.

c. a written call option on 100 units of the underlying asset with a strike price of 60.

d. a owned put option on 50 units of the underlying asset with a strike price of 50.

            e. a portfolio of options consisting of each of a through d above.

(You may describe the payoffs on these using tables or diagrams. I have a slight preference for diagrams because of the next question.)

Answer 1

a) Here we are the holder of the call options hence we will exercise the option if the market price is more than the strike price

Statement showing payoff[assuming premium paid is $5]

Market price at expiration	Exercise or not	Profit per unit	units	Total profit
30	NE	-5	100	-500
40	NE	-5	100	-500
50	E	-5	100	-500
60	E	5	100	500
70	E	15	100	1500
78	E	25	100	2500
90	E	35	100	3500

B) Here we have bought put option hence we will exercise the option if market price is less than strike price[assuming premium paid is $5]

Statement showing Payoff

Market price at expiration	Exercise or not	Profit per unit	units	Total profit
10	E	25	50	1250
20	E	15	50	750
30	E	5	50	250
40	E	-5	50	-250
50	NE	-5	50	-250
60	NE	-5	50	-250
70	NE	-5	50	-250

C) Here we are writter of call option , hence our maximum profit is premium received

Statement showing payoff

Assuming premium of 5

Market price at expiration	Exercise or not	Profit per unit	units	Total profit
30	NE	5	50	250
40	NE	5	50	250
50	E	5	50	250
60	E	5	50	250
70	E	-5	50	-250
80	E	-15	50	-750
90	E	-25	50	-1250

D) Here we are writer of put option, hence maximum profit is equal to premium received

Premium = 5$

Statement showing Pay off

Market price at expiration	Exercise or not	Profit per unit	units	Total profit
30	E	-15	100	-1500
40	E	-5	100	-500
50	E	5	100	500
60	NE	5	100	500
70	NE	5	100	500
80	NE	5	100	500
90	NE	5	100	500