Question

What's the profit at maturity of a short call sold at p that has a strike K, if the underlying asset price is S ?

Group of answer choices

All the other choices.

p - max(S - K, 0)

p + min(K - S, 0)

p + K - S if S > K, and p otherwise.

What's the profit at maturity of a short put sold at p that has a strike K, if the underlying asset price is S ?

Group of answer choices

All the other choices.

p - max(K - S, 0)

p + min(S - K, 0)

p + S - K if K > S, and p otherwise.

Answer 1

Profit under call option is generated when the value of underlying asset (S) increases beyond the strike price (K). The Net Profit would then be the profit generated reduced by the expense made for this arrangement, viz., option price (p).

So, the formula, p-max(S-K,0), p+min(K-S,0), and p+K-S if S>K, and p otherwise, all return the same values. Hence, All the other choices is the correct answer.

Profit under put option is generated when the value of underlying asset (S) decreases below the strike price (K). The Net Profit would then be the profit generated reduced by the expense made for this arrangement, viz., option price (p).

So, the formula, p+min(S-K,0), p + min(S - K, 0), p + S - K if K > S, and p otherwise, all return the same values. Hence, All the other choices is the correct answer.