Question

You own a call option on Intuit stock with a strike price of $37. When you purchased the option, it cost $5. The option will expire in exactly three months' time. a. If the stock is trading at $50 in three months, what will be the payoff of the call? What will be the profit of the call? b. If the stock is trading at $22 in three months, what will be the payoff of the call? What will be the profit of the call? c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. d. Redo c, but instead of showing payoffs, show profits. a. The payoff of the call is $ and the profit of the call is $ (Round to the nearest dollar.) b. The payoff of the call is $ and the profit of the call is $ (Round to the nearest dollar.)

Answer 1

Strike Price = X = $37

Premium Paid = P = $5

Stock Price = S

(a) Stock Price = $50

Payoff = S - X = 50 - 37 = $13

(b) Profit = S - X - P = 50 - 37 - 5 = $8

(c) Payoff = S - X = S - 37

The payoff curve is positive when Stock Price > 37

For Stock Price < Strike Price, the option becomes worthless

Hence, Correct Diagram is (A)

(d) Profit = S - X - P = S - 37 - 5 = S - 42

The profit curve is positive when Stock Price > 42

Hence, Correct Diagram is (A)