Question

Consider a 1000-strike put option on the S&R index with 6 months to expiration. At the time the option is written, the put writer receives the premium of $74.20. Suppose the index in 6 months is $1100. The put buyer will not exercise the put. Thus, the put writer keeps the premium, plus 6 months’ interest, for a payoff of 0 and profit of

$75.68.
If the index is $900 in 6 months, the put owner will exercise, selling the index for

$1000. Thus, the option writer will have to pay $1000 for an index worth $900. Using equation (2.9), the written put payoff is

− max[0, $1000 − $900] = −$100
The premium has earned 2% interest for 6 months and is now worth $75.68. Profit for the

written put is therefore

−$100 + $75.68 = −$24.32

QUESTION : In excel graph the profit diagram for a written put. As you would expect, it is the

mirror image of the purchased put.

Answer 1