Mr. Eisner sold 10 Microsoft put options and bought 5 Microsoft call options. Both options have the same exercise price of $80 and the same expiration date. Draw the payoff diagram with respect to the price of Microsoft stock at expiration. The solution provided for this question is attched. But I dont understand the payoff for sold put options, if the stock price is less than the strike price then shouldn't the seller would be at loss? why is it given (St-80) and if the stock price is greater than the strike price then shouldnt the seller gain profit? of the premium then why is it given 0? Please explain in simple terms, steo by step.
Mr. Eisner sold 10 Microsoft put options and bought 5 Microsoft call options. Both options have the same exercise price of $80 and the same expiration date. Draw the payoff diagram with respect to the price of Microsoft stock at expiration. The solution provided for this question is attched. But I dont understand the payoff for sold put options, if the stock price is less than the strike price then shouldn't the seller would be at loss? why is it given (St-80) and if the stock price is greater than the strike price then shouldnt the seller gain profit? of the premium then why is it given 0? Please explain in simple terms, steo by step.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Mr. Eisner sold 10 Microsoft put options and bought 5 Microsoft call options. Both
options have the same exercise price of $80 and the same expiration date. Draw
the payoff diagram with respect to the price of Microsoft stock at expiration.
The solution provided for this question is attched. But I dont understand the payoff for sold put options, if the stock price is less than the strike price then shouldn't the seller would be at loss? why is it given (St-80) and if the stock price is greater than the strike price then shouldnt the seller gain profit? of the premium then why is it given 0? Please explain in simple terms, steo by step.
Transcribed Image Text:Q9
Let ST
K
Payoffs to Mr. Eisner's Portfolio
Sell 10 Puts (K=$80)
Buy 5 Calls (K=$80)
Total
50 55 60
Payoff
= the stock price at expiration
= the strike price
200
150
100
50
0
-50
-100
-150
-200
-250
-300
-350
Expiration
If ST ≤ $80
If ST> $80
10(ST-$80)
0
10ST - $800
0
5(ST-$80)
5ST - $400
65 70 75 80 85 90 95 100 105 110
Stock Price at Expiration
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