Solution: Computing Vanilla Option Payoffs

Exercise: Computing Vanilla Option Payoffs

Solution

For $S_T=80$, the call pays $0$ and the put pays $20$. For $S_T=100$, both pay $0$. For $S_T=125$, the call pays $25$ and the put pays $0$.

A call is in the money when $S_T>K$; a put is in the money when $S_T<K$.

Takeaways

• Option payoffs are state-contingent cash flows.
• The strike is the kink point.
• In-the-money status is not the same as total trade profitability.