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numbers next to each point (i.e. indicate intersections with the horizontal and
vertical axes and any points where the payoff/profit function changes abruptly). Third Mug Inc. stock currently sells for $30 per share
a) (4 Points) Consider a put option on Third Mug Inc. stock with a strike price of
$32 and time to expiration of one year. Draw the PAYOFF diagram for a
protective put position (i.e. assume you own a share of Third Mug stock and you
hold a put option as well). )Step
◦ 1: Identify your positions You own:
) One Put option ) One share )Step
) 2: Identify the exercise price(s): 32$ Remember that the option payoff(profit) pattern changes at the strike price. )Step 3: Separately identify the payoff(profit) for your Step 1: Identify your positions You own: ◦ ◦ One Put option with Exercise price 32$
One share Step3a: Payoff K=32$ (Step2) for Put option with Exercise price of Payoff = max{ K − ST ,0} Stock Price (St) 10 32 40 50 60 100 Put Payoff 31 22 0 0 0 0 0 Stock Price (St) 1$ 10 32 40 50 60 100 Share Payoff 1$ 1 10 32 40 50 60 100 Step 3b: Payoff for one share Step 4: Add up the payoffs(profits)
Stock Price (St) 1$ 10 32 40 50 60 100 Put Payoff 31 22 0 0 0 0 0 Share Payoff 1 10 32 40 50 60 100 Total Payoff: Protective put 32 32 32 40 50 60 100 Important notes
Pattern changes at strike price(s) so
make sure you have enough points
around the strike price(s) In case of multiple options there may
be a pattern change around ALL strike
prices Remember that Payoff and Profit are different! Use what the
question wants. Multiple optio...
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This note was uploaded on 07/01/2013 for the course COMM Comm 308 taught by Professor Kavehmoradi during the Fall '12 term at Concordia University Irvine.
 Fall '12
 KavehMoradi

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