Question

You shorted a call option on Intuit stock with a strike price of

​$3939.

When you sold​ (wrote) the​ option, you received

​$77.

The option will expire in exactly three​ months' time.

a. If the stock is trading at

​$5656

in three​ months, what will your payoff​ be? What will your profit​ be?

b. If the stock is trading at

​$3333

in three​ months, what will your payoff​ be? What will your profit​ be?

c. Draw a payoff diagram showing the payoff at expiration as a function of the stock price at expiration.

d. Redo​ c, but instead of showing​ payoffs, show profits.

Answer 1

a:

Payoff will be negative since stock appreciated we are on short position;

Payoff= strike price- exercise price= 3939-5656 = -1717

Profit = Payoff+ premium recieved = -1717+77 =-1640

b:

stock is trading below 3939; hence for an call option seller, if stock is below exercise price. Payoff=0

Profit will be the premium recieved. Profit=77

c: & d:

	Payoff	Premium	Profit (payoff_+ premium)
2500	0	77	77
2600	0	77	77
2700	0	77	77
2800	0	77	77
2900	0	77	77
3000	0	77	77
3100	0	77	77
3200	0	77	77
3300	0	77	77
3400	0	77	77
3500	0	77	77
3600	0	77	77
3700	0	77	77
3800	0	77	77
3900	0	77	77
4000	-61	77	16
4100	-161	77	-84
4200	-261	77	-184
4300	-361	77	-284
4400	-461	77	-384
4500	-561	77	-484
4600	-661	77	-584
4700	-761	77	-684
4800	-861	77	-784
4900	-961	77	-884
5000	-1061	77	-984
5100	-1161	77	-1084
5200	-1261	77	-1184
5300	-1361	77	-1284
5400	-1461	77	-1384
5500	-1561	77	-1484
5600	-1661	77	-1584
5700	-1761	77	-1684
5800	-1861	77	-1784
5900	-1961	77	-1884
6000	-2061	77	-1984
6100	-2161	77	-2084
6200	-2261	77	-2184
6300	-2361	77	-2284
6400	-2461	77	-2384
6500	-2561	77	-2484