Question on principals of option pricing

Fi. You buy the stock (-$40) and sell the call (+$7) = “covered call”. At expiration the call is exercised at $40 so the person pays you $40 and you give them the stock you bought. As long as the stock price > the strike the stock price isn’t relevant to your cash flow. The stock could be $152 and your cash flow would still be the same.
Gi. you buy the stock (-$60) and buy the put (-$5) = “protective put”, so your current cash flow is -$65. at expiration the stock is worth $68, so you sell the stock for $68. The put expires worthless because the stock isn’t lower than the exercise price. You net cash flow is -$65 + $68 = $3.
 
It might speed you up if you learn to express your positions the way the book suggests. Specifically, whenever you buy/go long something, you enter it with a “+”. If you’re selling/going short you enter it with a “-“. For stocks you just enter its price; for options the respective payoff (max(0, S-X) for calls; max(0, X-S) for puts), and for bonds just par value (usually X), sometimes discounted.
In F.i, you have bought the stock and shorted the call. So your position is worth: +52 - max(0, 52-40) = 40
In F.ii you have the exact same position, but a different price of underlying. +38 - max(0, 38-40) = 38
In G.i, you have bought the stock and bought the put. So your position is worth: +68 + max(0, 60-68) = 68
In G.ii you have the same position with a difference stock price. It is worth: +50 + max(0, 60-50) = 60
 
orang3eph wrote:It might speed you up if you learn to express your positions the way the book suggests. Specifically, whenever you buy/go long something, you enter it with a “+”. If you’re selling/going short you enter it with a “-“. For stocks you just enter its price; for options the respective payoff (max(0, S-X) for calls; max(0, X-S) for puts), and for bonds just par value (usually X), sometimes discounted.
In F.i, you have bought the stock and shorted the call. So your position is worth: +52 - max(0, 52-40) = 40
In F.ii you have the exact same position, but a different price of underlying. +38 - max(0, 38-40) = 38
In G.i, you have bought the stock and bought the put. So your position is worth: +68 + max(0, 60-68) = 68
In G.ii you have the same position with a difference stock price. It is worth: +50 + max(0, 60-50) = 60
Is the best answer.
Basically, cover the part where you are buying a stock (at the latest market price) and add/subtract to that the price of the option you are buying/selling. Call options should be priced as Max(0,S-X) and Put options should be priced as Max(0, X-S) where S is the value of the asset (in this case, stock) and X is the exercise price.
 
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