Call Option Payoff Patterns

Time 0 Time T

Purchase call option, Terminal call payoff,

cash flow < 0 Max[ST - X,0] > 0

Between times 0 and T:

Cash flow = 0 for European option
Cash flow > 0 for American option

Write (I.e., issue) call option, Pay terminal call payoff

cash flow > 0 = - Max[ST - X, 0] < 0

Between times 0 and T:

Cash flow = 0 for European option
Cash flow < 0 for American option

Put Option Payoff Patterns

Time 0 Time T

Purchase put option, Terminal put payoff,

cash flow < 0 Max[X - ST,0] > 0

Between times 0 and T:

Cash flow = 0 for European option
Cash flow > 0 for American option

Write (I.e., issue) call option, Pay terminal call payoff

cash flow > 0 = - Max[X - ST, 0] < 0

Between times 0 and T:

Cash flow = 0 for European option
Cash flow < 0 for American option
Cash flows
of call buyer

Cash flows
of call writer

Cash flows
of put buyer

Cash flows
of put writer
 A B C D E F
1 MOST ACTIVE OPTIONS, 3 OCTOBER 2006
2 Stock

Option
Option Put or
3 Rank Symbol Name exercise
expiration call?
price
4 1 #REF! Halliburton 20-Apr-07 27.5 Put
5 2 #REF! Halliburton 19-Jan-07 27.5 Put
6 3 HAL Halliburton 19-Jan-07 30.0 Put
7 4 QQQQ Nasdaq 100 Index 20-Oct-06 40.0 Put
8 5 HAL Halliburton 20-Apr-07 22.5 Put
9 6 IWM Russell 2000 Index 17-Nov-06 70.0 Put
10 7 QQQQ Nasdaq 100 Index 17-Nov-06 39.0 Put
11 8 IWM Russell 2000 Index 20-Oct-06 72.0 Put
12 9 SPY S&P Depository Receipts ("Spider") 15-Dec-06 120.0 Put
13 10 SPY S&P Depository Receipts ("Spider") 15-Dec-06 139.0 Call
14 11 SPY S&P Depository Receipts ("Spider") 15-Dec-06 126.0 Put
15 12 IWM Russell 2000 Index 20-Oct-06 71.0 Put
16 13 QQQQ Nasdaq 100 Index 20-Oct-06 40.0 Call
17 14 BMY Bristol-Myers Squibb 20-Oct-06 22.5 Call
18 15 SPY S&P Depository Receipts ("Spider") 20-Oct-06 125.0 Put
19 16 S Sprint Nextel 17-Nov-06 17.5 Call
20 17 IWM Russell 2000 Index 20-Oct-06 69.0 Put
21 18 SPY S&P Depository Receipts ("Spider") 20-Oct-06 137.0 Call
22 19 QQQQ Nasdaq 100 Index 20-Oct-06 41.0 Put
23 20 MMM MMM 20-Oct-06 85.0 Put
24
25 Volume: Number of options traded on 4 Oct. 2006. Each option is for 100 shares, but price quotes are per share.
26 Open interest: Number of open positions at end of day. A position is closed out (i.e., not open) if the option has been s
 G H I J K L
OCTOBER
1 2006

Stock Option
Open
3 closing closing Volume
Interest
price price
4 26.75 3.025 60,945 7,305 -2.275
5 26.75 2.450 59,767 61,121 -1.7
6 26.75 4.100 59,131 68,782 -0.85
7 40.31 0.475 57,073 262,601 -0.475
8 26.75 1.025 53,901 5,530 -1.025
9 71.22 1.650 49,387 203,975 -1.65
10 40.31 0.575 45,666 93,169 -0.575
11 71.22 1.650 43,432 154,148 -0.87
12 133.36 0.400 40,125 32,090 -0.4
13 133.36 0.850 40,116 21,036 -0.85
14 133.36 0.925 40,082 32,249 -0.925
15 71.22 1.200 39,015 168,035 -1.2
16 40.31 0.875 37,502 196,355 -0.565
17 24.82 2.325 31,989 10,934 -0.005
18 133.36 0.075 31,964 25,569 -0.075
19 16.97 0.525 31,350 9,078 -0.525
20 71.22 0.600 30,777 111,620 -0.6
21 133.36 0.125 30,199 6,261 -0.125
22 40.31 0.975 29,881 94,955 -0.285
23 74.03 11.000 25,732 6,364 -0.03
24
es, but price quotes
25 are per share.
26if the option has been sold by day end.
t (i.e., not open)
 A B C D E F G H

1
HALLIBURTON JAN07 OPTIONS, PRICES ON 3OCT06
Closing price of stock: 26.75, down 1.29
2 Calls Puts
Closing Closing
Exercise Open Open
3 option Volume option Volume
price interest interest
price price
4 15.0 11.90 20 1,724 0.05 50 1,153
5 17.5 12.70 23 9,449 0.05 140 3,312
6 20.0 7.17 5 13,801 0.20 50 18,277
7 22.5 5.00 339 4,595 0.60 49 15,247
8 25.0 3.20 200 3,306 1.25 423 21,793
9 27.5 1.85 571 3,918 2.50 53,267 61,121
10 30.0 0.95 2,140 12,008 4.10 52,631 68,782
11 32.5 0.55 810 10,527 6.00 216 21,562
12 33.8 0.40 78 2,276 6.90 168 3,378
13 35.0 0.30 231 69,727 8.10 142 20,258
14 36.3 0.20 460 5,989 8.00 2 1,280
15 37.5 0.15 1,249 78,762 9.10 5 5,530
16 40.0 0.10 32 85,037 11.01 16 322
17 42.5 0.05 170 24,439 15.70 135 1,920
18 45.0 0.05 6 8,509 17.10 76 0
19 47.5 0.05 10 6,591 14.60 76 0
20 50.0 0.05 20 10,528 17.00 52 0
21 55.0 0.05 12 694 22.10 28 0
 Page 427 data

Profit Patterns from GP Stock and Options

Initial GP stock price 40
Terminal GP stock price 70

Profit from bought stock 30 <-- =B4-B3

Profit from shorted stock -30 <-- =-B4+B3

Call exercise price 40

Call price, July 4
Bought call profit 26 #VALUE!
Written call profit -26 #VALUE!

Put exercise price 40

Put price, July 2
Bought put profit -2 #VALUE!
Written put profit 2 #VALUE!

Terminal
stock Bought Shorted Bought Written
price stock stock call call
0 -40 40 -4 4
5 -35 35 -4 4
10 -30 30 -4 4
15 -25 25 -4 4
20 -20 20 -4 4
25 -15 15 -4 4
30 -10 10 -4 4
35 -5 5 -4 4
40 0 0 -4 4
45 5 -5 1 -1
50 10 -10 6 -6
55 15 -15 11 -11
60 20 -20 16 -16
65 25 -25 21 -21
70 30 -30 26 -26
75 35 -35 31 -31

Page 8
 Page 427 data

Bought Written
put put
38 -38
33 -33
28 -28
23 -23
18 -18
13 -13
8 -8
3 -3
-2 2
-2 2
-2 2
-2 2
-2 2
-2 2
-2 2
-2 2

Page 9
 UN-10F

Stock Profit Patterns

50

40

30

20

10
Profit ($)

0
0 10 20 30 40 50 60 70 80

-10
Terminal stock price, ST ($)

-20

-30

-40 Bought stock Shorted stock

-50

Page 10
 UN-10G

Call Option Profit Patterns

40

30

20

10
Profit ($)

0
0 10 20 30 40 50 60 70 80
Terminal stock price, ST ($)
-10

-20

-30
Bought call Written call
-40
 Page 430

Put Option Profit Patterns

50

40

30

20

10
Profit ($)

0
0 10 20 30 40 50 60 70 80
-10 Terminal stock price, ST ($)

-20

-30 Bought put Written put

-40

-50

Page 12
 Page 431 data

Profit Patterns from Protective Put

Initial GP stock price = X 40
Terminal GP stock price 30

Put exercise price 40

Put price, July 2

Profit from stock, September -10 #VALUE!

Profit from put, September 8 #VALUE!
Protective put profit -2 #VALUE!

Terminal
stock Stock Put Protective
price profit profit put profit
<-- Data table header
0 -40 38 -2
5 -35 33 -2
10 -30 28 -2
15 -25 23 -2
20 -20 18 -2
25 -15 13 -2
30 -10 8 -2
35 -5 3 -2
40 0 -2 -2
45 5 -2 3
50 10 -2 8
55 15 -2 13
60 20 -2 18
65 25 -2 23
70 30 -2 28

Page 13
 Page 431 data

<-- Data table header

Page 14
 Protective Put Profit
50

40

30

20

10
Profit ($)

0
0 10 20 30 40 50 60 70 80
-10 Terminal stock price, ST ($)

-20

-30

-40

-50
 Page 432 data

Profit Patterns from a Spread

Call price, X=40 4
Call price, X=50 2
Terminal stock price, ST 60

Profit from written X = 50 call -8 #VALUE!

Profit from purchased X = 40 call 16 #VALUE!
Bull spread profit 8 #VALUE!

Stock Purchased Written Spread

price call, X=40 call, X=50 profit
<-- Data table header, hidden
0 -4 2 -2
5 -4 2 -2
10 -4 2 -2
15 -4 2 -2
20 -4 2 -2
25 -4 2 -2
30 -4 2 -2
35 -4 2 -2
40 -4 2 -2
45 1 2 3
50 6 2 8
55 11 -3 8
60 16 -8 8
65 21 -13 8
70 26 -18 8

Page 16
 Page 432 data

<-- Data table header, hidden

Page 17
 UN-10J

Bull Spread Profit Chart

30

25

20

15
Profit ($)

10

0
20 30 40 50 60 70 80
-5 Terminal stock price, ST ($)

-10

Purchased Written Spread

call, X=40 call, X=50 profit
 A B
1 Proposition 1--Higher Lower Bounds for Call Prices
2 Current stock price, S0 83
3 Option time to maturity, T 0.5
4 Option exercise price, X 80
5 Interest rate, r 10%
6
7 Naive minimum option price, Max(S0-X,0) 3
8 Proposition 1 lower bound on option price, Max(S0 - Exp(-rT)X,0) 6.902
 C
r Bounds for
1 Call Prices
2
3
4
5
6
7 #VALUE!
8 #VALUE!
 Proposition 3--Lower Lower Bounds for Put Prices
Current stock price, S0 55
Option time to maturity, T 0.5
Option exercise price, X 80
Interest rate, r 10%

Naive minimum put option price, Max(X- S0,0) 25

Proposition 3 lower bound on put price, Max(Exp(-rT)X- S0,0) 21.098
unds for Put Prices

#VALUE!
#VALUE!
 A B C
1 Put-Call Parity
2 Current stock price, S0 55
3 Option time to maturity, T 0.5
4 Option exercise price, X 60
5 Interest rate, r 10%
6 Call price, C0 3
7 Put price, P0 5.0738 #VALUE!
8
This spreadsheet uses put-call parity to derive the put price P0 from the call price
9
C0, the interest rate r, the time to maturityT, and the exercise price X.