Question

Draw a generic payoff diagram for the option that the trader should buy. Superimpose the diagram for the option writer. Show the strike price, breakeven point, in the money and out of the money regions. You do not need to factor in the option premium per unit to draw the diagram

Answer #1

For Call Option Seller, the Inflow of premium takes place first. So the yellow line is for call option seller, as the stock price increases and crosses strike price, the premium that you have gained gets eaten up and as the stock price keep on increasing, so unlimited loss.

For Call option buyer, you pay premium, so start with outflow of cash. As stock price increases and crosses strike price, then you recover premium paid and earn unlimited profit.

A trader conducts a trading strategy by selling a call option
with a strike price of $50 for $3 and selling a put option with a
strike price of $40 for $4. Please draw a profit diagram of this
strategy and identify the maximum gain, maximum
loss, and break-even point. Hint: Write down a profit
analysis matrix to help you draw the payoff lines.

1. You buy a put option with strike price of $25. Currently, the
market value of the underlying asset is $30. The put option premium
is $3.25. Assume that the contract is for 150 units of the
underlying asset. Assume the interest rate is 0%. a. What is the
intrinsic value of the put option? b. What is the time value of the
put option? c. What is your net cash flow if the market value of
the options’ underlying...

A trader sells a European call option on a share for 4 SEK. The
stock price is 47 SEK and the strike price is 50 SEK. Under what
circumstances does the trader make a profit? Under what
circumstances will the option be exercised? Draw a diagram showing
the variation of the trader’s profit with the stock price at the
maturity of the option.
Please carefully label: Breakeven point, profit, loss and don't
forget the diagram.. thanks in advance!

You buy a put option with strike price of $40 and simultaneously
buy two call options with the same strike price, $40. Currently,
the market value of the underlying asset is $39. The put option
premium is $2.50 and a call option sells for $3.25. Assume that the
contract is for 1 unit of the underlying asset. Assume the interest
rate is 0%. Draw a diagram depicting the net payoff (profit
diagram) of your position at expiration as a function...

Draw the payoff picture at expiration for a long position in a
put option that has a premium of $3.50 and a strike price of
$35.

please do all the three questions and show me all the
calculations step by step and the diagram also.
1. Assume you have purchased a June put option on British
pounds: the strike price is $1.30/£; the option premium is $0.10/£;
and it is European style.
1) Please fill out the blanks in the table.
Spot rate at maturity (in June)
Exercise or not?
Net profit or payoff
1.10
1.15
1.20
1.25
1.30
1.35
1.40
1.45
2) Where is the...

Assuming you are a gold trader. You expect to buy 1,000 g of
gold on 30 December. Since the gold price in the market is on an
increasing trend, you decided to purchase a call option from a
counterparty (call writer). The strike price of the gold is $235
per g and you will have to pay an option premium of $10 per g for
this right.
a) If the gold price increase to $245, what would be the price...

You buy a put option on one unit of the underlying asset. The
option has a premium of $3.50 and a strike price of $15. As the
option is about to expire, the underlying asset is worth $21.70.
What will your net payoff be?

You buy a call option and buy a put option on bond X. The strike
price of the call option is $90 and the strike price of the put
option is $105. The call option premium is $5 and the put option
premium is $2. Both options can be exercised only on their
expiration date, which happens to be the same for the call and the
put.
If the price of bond X is $100 on the expiration date, your...

6. You decided to hedge the risk of wheat prices with an option.
You expected that wheat prices will rise within the next few months
because of the shortage of supply caused by drought. The strike
price of the option is $310 with a premium of $10. If your
expectations were right, and wheat is going for $350 in the market,
what is your profit after premium?
A. Buy a put option, the option will be at the money, the...

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