determine the payoff of the option strategies

[h21]

Hi all, I have two questions about the ‘payoff of an option strategies’, see

• The underlying is a stock priced at $40. A call option with an exercise price of $40 is selling for $7. You buy the stock and sell the call. At expiration, the stock price is
  1. $52.- my thinking is 40-40+7
  2. $38-my thinking is 7+38-2
• The underlying is a stock priced at $60. A put option with an exercise price of $60 is priced at $5. You buy the stock and buy the put. At expiration, the stock price is
  1. $68-my thinking is 68-60-5
  2. $50.-my thinking is 60-50-

However the answers are

• 52 – Max(0,52 – 40) = 40
• 38 – Max(0,38 – 40) = 38

• 68 + Max(0,60 – 68) = 68
• 50 + Max(0,60 – 50) = 60

Am I just not getting what pay off means right? It is how much you get with the option exercised, but shouldnt we consider the option investment and bond investment in the begining isnt that what pay off means?I see where the answer comes from, someone help me understand the question

 

[S2000magician]

The payoff is the amount that the portfolio is worth at expiration; the price of the portfolio today doesn’t enter into it.

 

[h21]

S2000magician wrote:
The payoff is the amount that the portfolio is worth at expiration; the price of the portfolio today doesn’t enter into it.

AHHHHHH

 

[S2000magician]

You make me sound like a dentist.