Option Premium

OPTIONS PAYOFFS

The optionality characteristic of options results in a non­linear payoff for options. In simple words, it means that the losses for the buyer of an option are limited, however the profits are potentially unlimited. For a writer, the payoff is exactly the opposite. His profits are limited to the option premium, however his losses are potentially unlimited. These non-linear payoffs are fascinating as they lend themselves to be used to generate various payoffs by using combinations of options and the underlying. We look here at the six basic PAYOFFS:

PAYOFF PROFILE OF BUYER OF ASSET LONG ASSET:

In this basic position, an investor buys the underlying asset, Nifty for instance, for 2220, and sells it at a future date at an unknown price. Once it is purchased, the investor is said to be “long” the asset.

PAYOFF PROFILE FOR SELLER OF ASSET SHORTASSET

In this basic position, an investor shorts the underlying asset. Nifty for instance, for 2220, and buys it back at a

future date at an unknown price. Once it is sold, the investor is said to be short the asset.

 

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