Question

1. What's the profit of a call option that is “At The Money” at expiration? (Simplify the answer as much as possible)

2. What's the profit of a short put option that is “At The Money” at expiration? (Simplify the answer as much as possible)

3. What's your maximum gain if you’re short a call option and long the corresponding put option? (Same underlying asset, same strike price, same expiration date) (Simplify the answer as much as possible)

Answer 1

1. What's the profit of a call option that is “At The Money” at expiration?

At the Money” at expiration means that underlying stock price is equal to strike price

And

Intrinsic value for call option = underlying stock price - strike price

Therefore intrinsic value for call option will be equal to zero

But the profit/loss of a call option that is “At the Money” at expiration equal to its intrinsic value - call premium

Therefore call option will be at loss equal to its premium amount

2. What's the profit of a short put option that is “At The Money” at expiration?

At the Money” at expiration means that underlying stock price is equal to strike price. And

Intrinsic value for put option = strike price - underlying stock price

Therefore intrinsic value for put option will be equal to zero

But the profit of a short put option that is “At the Money” at expiration equal to put premium (short put option means selling or writing a put option)

3. What's your maximum gain if you’re short a call option and long the corresponding put option? (Same underlying asset, same strike price, same expiration date)

Short a call option means selling a call option in the anticipation that the price of underlying asset will fall in future

Maximum gain from short call option is limited to its call premium when the call option expires worthless the seller will get premium

Long on put option means buying a put option in the anticipation that the price of underlying asset will fall in future

The maximum gain from long put option = strike price –put premium

Therefore, now combining both option strategy

Your maximum gain if you’re short a call option and long the corresponding put option = strike price + call premium – put premium