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Question 14.18: How does the price of an option and the exercise price affec...

How does the price of an option and the exercise price affect the payoff from an option.

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The payoff (that is, profit) for a call option is the price of the underlying − exercise price − option premium; the greater the option premium, the more that the underlying’s price must exceed the exercise price for a profit. The payoff (that is, profit) for a put option is the price exercise price − price of the underlying − option premium; the greater the option premium, the more that the price of the underlying must be less than the price of the underlying to be profitable.

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