Receivesanupfrontfeeputpremium

Info iconThis preview shows page 1. Sign up to view the full content.

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

Unformatted text preview: ney ­ When the stock price > exercise price (X) at expiry date ­ Buyer will not exercise the option, because you will be selling at X, which is lower than current market price (> X). ­ Option expires unexercised. Options Options Put Option 3. At the money ­ When the stock price = exercise price (X) at expiry date ­ Buyer will not exercise the option because cost of the put premium is incurred. ­ Option expires unexercised. Payoff function Payoff function ­ Buyer of a Put Option Profit ($) Payoff = $1.35 Stock Price at Expiration ($) A = $8.35 0 D = $7.00 Put Premium = $0.65 X = $9.00 Payoff function Payoff function ­ Buyer of a Put Option In the money ($7.00) When the stock price ($7.00) < X ($9.00) Profit = $9.00 ­ $7.00 ­ $0.65 = $1.35 (Buy at market: $7, sell at X: $9). Breakeven Point ($8.35) When the stock price ($8.35) < X ($9.00) Profit = $9.00 ­ $8.35 ­ $0.65 = 0 At the money ($9.00) When the stock price ($9.00) = X ($9.00) Loss = $9.00 ­ $9.00 ­ $0.65 = ­$0.65 Payoff function Payoff function ­ Buyer of a Put Option Upside potential – Buyer will benefit from decreases in stock prices. – Appropriate for expected decreases in prices of underlying assets. Downside limit – When stock prices rise to equate exercise price, buyer will not exercise right, hence losses are limited to put premium. Writer of a put option Writer of a put option The writer of a put option sells the option to the buyer (taking a short position in the option)....
View Full Document

This document was uploaded on 04/02/2014.

Ask a homework question - tutors are online