Question

Fin 463/565 inclass assignment Chapter 9 1. Draw a payoff and a profit line graph for writing a put option at K= $60. Each option price costs = $8. Under what circumstances will the writer of the option (the party with the short position) make a profit? 2. Consider an exchange-traded call option contract that lets you buy 500 shares with o strike price of $40. Explain how the terms of the option contract change when there is a) A 10% stock dividend b) A 10% cash dividend c) A 4-for-1 stock split a) Suppose you write five naked call option contracts. The option price is $3.50, the strike price is $60.00, and the stock price is $57.00. What is the margin requirement? b) Suppose you write five naked PUT option contracts. What is the initial margin requirement?

Answer 1

You have asked multiple unrelated questions in the same post. I have addressed the first one. Please post the balance questions separately one by one.

Q - 1

K = 60; Put option cost = P = 8; Let's say S is the stock price on the day of expiration of the option.

Payoff from writing a put option = - max (K - S, 0) = - max (60 - S, 0)

Profit from writing a put option = P - max (K - S, 0) = 8 - max (60 - S, 0)

Plese see the payoff and the profit matrix in the table below, at different values of S. The line diagram follows the table:

Stock Price	Payoff	Profit
S	'-max (60 - S, 0)	8 - max (60 - S, 0)
0	-60	-52
10	-50	-42
20	-40	-32
30	-30	-22
40	-20	-12
50	-10	-2
60	0	8
70	0	8
80	0	8
90	0	8
100	0	8

And the diagram is:

Payoff and Profit from writing a put option Payoff Profit 1 10 20 30 40 50 60 70 80 90 100 Stock Price, s

Please see the profit line diagram in the graph above. The profit is positive when S > 52. If the stock price turns out to be > 52 at the time of expiration or exercise of put option, the write of the put option makes a profit.