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Suppose that you have taken a short position on a call option. The strike price if...

Suppose that you have taken a short position on a call option. The strike price if $55, and the option premium / price is $5. When the option expires, the value of the underlying asset is $54. What is your pay-off and profit / loss?

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Answer #1

Spot Price on expiry is LOWER THAN Strike Price. Therefore, Buyer will LAPSE the option. Therefore, Premium recieved is our income.

Pay-Off = Higher of (Underlying Price on expiry-Strike Price) and 0 = $0

Profit/(Loss) = Premium Received - Pay-Off = 5-0 = $5

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