Series 7

Derivatives - Graphical Interpretations for Puts

Now let's look at puts. This example is a long put - a put from the perspective of the buyer. Similar to the previous example, let's say it is 1 MNO May 100 put @ 3; so essentially the spot rate for the stock has to sink below $97 ($100 strike price minus $3 premium) to be in-the-money. It does not matter how far above the strike price the spot price goes; if the option is going to cost the buyer more than the premium, he will simply let it expire unexercised.

Figure 8.3: Long Put


Figure 8.4: Short Put

Payoff
One quick point about premiums: by figuring them in, you determine the profit or loss from an option. This is different from the payoff. To figure the payoff, simply assume the premium equals $0.



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