Practice Problem – Options Payoff

Practice Question

Intro to Finance
Options
Payoff
Short Answer

Jade has created the following portfolio:
• Sold 2 put options – Strike price $17 and maturity one year
• Bought 3 call options – Strike price $14 and maturity one year

Suppose at expiration the stock price is $15.00. What is the payoff for her strategy? Assume each option is for the purchase or sale of one share of stock only, not a bundle.

Answer +
Correct Answer: -1
Explanation +
Step 1: Define Variables
  • Stock price at expiration = $15.00
  • Put strike price = $17 (sold 2 puts)
  • Call strike price = $14 (bought 3 calls)
Step 2: Calculate Payoffs

Put options (sold 2):
Each put option payoff = max(17 - 15, 0) = $2
Since she sold 2 puts: 2 × (–$2) = –$4

Call options (bought 3):
Each call option payoff = max(15 - 14, 0) = $1
3 × $1 = $3

Step 3: Total Payoff

Total = –$4 (from puts) + $3 (from calls) = –$1

Final Answer:

The payoff for Jade’s strategy is –1.