Draw a payoff diagram

Assume that you have shorted the call option in Problem 2; when you originally sold (wrote) the option, you received $5.

a. If the stock is trading at $55 in three months, what will your payoff be? What will your profit be?

b. If the stock is trading at $35 in three months, what will your payoff be? What will your profit be?

c. Draw a payoff diagram showing the payoff at expiration as a function of the stock price at expiration.

d. Redo (c), but instead of showing payoffs, show profits.

Solution:

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