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Stock Trading: Payoff of a Call

Scenario: You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months time.

Questions:
a. If the stock is trading at $55 in three months, what will be the payoff of the call?
b. If the stock is trading at $35 in three months, what will be the payoff of the call?
c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration.

Please answer using Excel.

Solution Preview

Please see the attached Excel file as well. What is copied in this box is exactly what is found in the attachment.

a. If the stock is trading at $55 in three months, what will be the payoff of the call?

Payoff for a call option = Max (0, Stock Price - Exercise Price )
Stock Price = $55.00
Exercise (Strike) Price = ...

Solution Summary

This solution is comprised of a full, step by step response which illustrates how to calculate the payoff on a stock which is being traded. As per request, an Excel file is attached with the solution.

$2.19