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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
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
Stock Price at
Expiration ($) A = $8.35
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)....
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This document was uploaded on 04/02/2014.
- Spring '14