DefinitionsAndPayoffsAtExpirationofCallAndPuts

# DefinitionsAndPayoffsAtExpirationofCallAndPuts -...

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Deﬁnitions and Payoﬀs at Expiration of Calls and Puts1 I. The Options Contract An option contract has three elements. The underlying asset, exercise price (also called the strike price) and the expiration date. • Buyer of a call option is the right to buy stock at date t for the exercise price E. • Buyer of a put option is the right to sell stock at date t for the exercise price E. On the other side of each of these contracts is a counterparty. In options parlance “write” is the same as “sell”. • Writer of a call has the obligation to sell the stock at date t for the exercise price E if the counterparty chooses to exercise. • Writer of a put has the obligation to buy the stock at date t for the exercise price E if the counterparty chooses to exercise. II. Payoﬀs and Proﬁts at Expiration The payoﬀ at expiration is the dollar amount the investor receives at expiration from following the option strategy. The proﬁt at expiration is the payoﬀ, minus the cost of the setting up the strategy. Notation: S Stock price E 1 Exercise price Notes for Finance 100 (sections 301 and 302) prepared by Jessica A. Wachter. Claim: At expiration, Payoﬀ to buying a call Payoﬀ to buying a put = max[0, S − E ] = max[0, E − S ] For these examples, consider E = 100. Suppose that when the strategies were set up, calls and puts with this exercise price each cost \$10. 1. Buying a call (long a call) S 70 80 90 100 110 120 130 2. Buying a put (long a put) S 70 80 90 100 110 120 130 Payoﬀ Proﬁt 30 20 10 0 0 0 0 20 10 0 -10 -10 -10 -10 Payoﬀ Proﬁt 0 0 0 0 10 20 30 -10 -10 -10 -10 0 10 20 3. Selling (writing) a call (short a call) S 70 80 90 100 110 120 130 4. Selling (writing) a put (short a put) S 70 80 90 100 110 120 130 Payoﬀ Proﬁt -30 -20 -10 0 0 0 0 -20 -10 0 10 10 10 10 Payoﬀ Proﬁt 0 0 0 0 -10 -20 -30 10 10 10 10 0 -10 -20 ...
View Full Document

## This document was uploaded on 09/24/2009.

### Page1 / 3

DefinitionsAndPayoffsAtExpirationofCallAndPuts -...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online