Page 135 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes in-the-money and trades at a higher premium than the at-the-money put at a strike of
1250. The put with a strike of 1200 is deep out-of-the-money and will only be exercised in
the unlikely event that underlying falls by 50 points on the expiration date. Figure 2
shows the payoffs from writing puts at different strikes.

Figure 1: Payoff for Buyer of Call Options at Various Strikes

Underlying Strike Price of Option Call Premium (`) Put Premium (`)
1250 1200 80.10 18.15
1250 1225 63.65 26.50
1250 1250 49.45 37.00
1250 1275 37.50 49.80
1250 1300 27.50 64.80

Profit

1200 1250 1300
Underlying security
27.50
49.45
80.10
Loos

The figure 1 shows the profits/losses for a buyer of calls at various strikes. The in-the-
money option with a strike of 1200 has the highest premium of ` 80.10 whereas the out-of-
the- money option with a strike of 1300 has the lowest premium of ` 27.50.

Figure 2: Payoff for Writer of Put Options at Various Strikes
Profit
64.80
37.00
18.15
1200 1250 1300
Underlying security

Loss

The figure 2 above shows the profits/losses for a writer of puts at various strikes. The in-
the money option with a strike of 1300 fetches the highest premium of ` 64.80 whereas the
out of- the-money option with a strike of 1200 has the lowest premium of ` 18.15.
In the example in Figure 2, at a price level of 1250, one option is in-the-money and one is
out-of-the-money. As expected, the in-the-money option fetches the highest premium of
` 64.80 whereas the out-of-the-money option has the lowest premium of ` 18.15.

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