An investor writes a European call on a share for £2. The current stock price is...

An investor writes a European call on a share for £2. The current stock price is £31 and the strike price is £25. The maturity of the option is in 3 months. Briefly discuss the investor’s motivation for selling the call option. Draw a diagram showing the investor’s potential profit/loss on this position at the maturity.

Expert Solution

Investor expects stock prices to go down is the reason behind selling call option. According to his expectation stock price will be less than $25 and option will lapse. Profit as per his estimate is $2 premium received.

Payoff table is:

a	b= 120	c	d=max-(0, c-b)	e= a+d
Option price	Strike price	Stock price at expiration	Option value	Net profit /(loss)
2	25	-	-	2
2	25	10	-	2
2	25	20	-	2
2	25	25	-	2
2	25	35	-10	-8
2	25	45	-20	-18

Graph is:

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jeff jeffy answered 1 year ago

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