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Stock Trading: Payoff of a Call

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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.

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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.

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See Also This Related BrainMass Solution

Call Option payoffs

Consider a European call option on stock A that expires on December 21 and has a strike price of $50.00.

a. If stock A is trading at $55 on December 21, what is the pay off to the owner on the option?
b. If Stock A is trading at $55 on December 21, what is the pay off to the seller of the option?
c. If stock A is trading at $45 on December 21, what is the pay off to the owner on the option?
d. If Stock A is trading at $45 on December 21, what is the pay off to the seller of the option?
e. Draw the payoff diagram to the owner of this option with respect to the stock price at expiration.
f. Draw the payoff diagram to the seller of this option with respect to the stock price at expiration.
g. If the seller of a call option never receives cash at expiration, why would anyone ever sell a call option?

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