Question

Suppose that you have taken a short position on a call option. The strike price if $55, and the option premium / price is $5. When the option expires, the value of the underlying asset is $54. What is your pay-off and profit / loss?

*** You must show your work to get credit (you can use both sides of the page to show your work)

Answer 1

You are a writer as you have shorted call option.

Writer receives the premium = his income = 5

Now strike price = 55

If price on expiry is higher than strike price, then writer will have negative payoff. But if price on expiry is lower than strike price, call option will not be exercised by buyer and so payoff = zero

In our case, price on expiry is 54, which is lower than strike price,

so payoff for writer = 0

profit for writer = premium received - payoff = 5 - 0 = 5

Answer : profit = 5 per share [Thumbs up please]