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Payoff Payoff
K
K ST ST
Long Put Short Put
Options: A Zero Sum Game
Write & Purchase Call Option:
Zero-Sum-Game
Premium Earned
x
Stock Price at Expiration
Premium Paid
Short Call
Options: A Zero Sum Game
Write & Pull Call Option:
Long Put
Premium Earned
Stock Price at Expiration
Premium Paid
Short Put
Terminology
Options are referred to as:
1. In-the-money:
In-the-money an option which would give the holder a
positive cash flow if it were exercised immediately.
2. At-the-money:
At-the-money an option which would lead to zero cash
flow if it were exercised immediately.
3. Out-of-the-money:
Out-of-the-money an option which would lead to a
negative cash flow if it were exercised immediately.