Question
Consider a 1000-strike put option on the S&R index with 6 months to expiration. At the time the option is written, the put writer receives
Consider a 1000-strike put option on the S&R index with 6 months to expiration. At the time the option is written, the put writer receives the premium of $74.20. Suppose the index in 6 months is $1100. The put buyer will not exercise the put. Thus, the put writer keeps the premium, plus 6 months interest, for a payoff of 0 and profit of
$75.68. If the index is $900 in 6 months, the put owner will exercise, selling the index for
$1000. Thus, the option writer will have to pay $1000 for an index worth $900. Using equation (2.9), the written put payoff is
max[0, $1000 $900] = $100 The premium has earned 2% interest for 6 months and is now worth $75.68. Profit for the
written put is therefore
$100 + $75.68 = $24.32
QUESTION : In excel graph the profit diagram for a written put. As you would expect, it is the
mirror image of the purchased put.
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