Question

Assume that you have shorted a call option on Intuit stock with a strike price of $40; when you originally sold (wrote) the option, you received $5. The option will expire in exactly three months' time. a. If the stock is trading at $55 in three months, what will your payoff be? What will your profit be? b. If the stock is trading at $35 in three months, what will your payoff be? What will your profit be? c. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration. d. Redo (c), but instead of showing payoffs, show profits. a. If the stock is trading at $55 in three months, your payoff is . The profit of the call is 7. (Round to the nearest dollar and include a negative sign where appropriate.) b. If the stock is trading at $35 in three months, your payoff is . The profit of the call is (Round to the nearest dollar and include a negative sign where appropriate.) c. Which of the graphs below is the best representation of a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration?

Answer 1

A) payoff of short call = - max (0, 55-40)

= - 15

Profit = payoff + premium on short call

= -15 + 5

= -10

B) payoff when price is 35 = -max (0, 35-40)

= 0

Profit = payoff + premium

= 0 + 5

= $5

C & D)

Payoff of short Call in & WNIO - Nwrna sio is 20 25 30 35 40 4's so Profit of short call, when price is 55 ar 35 20 25 30 3 to- -is- - 20- -25- 30