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a. The call seller receives $21.50 for writing the call. If the stock price at expiration is $740, the call expires valueless and the investor keeps the entire $21.50 as a profit. If the stock price is $890, the value of the call at expiration is $890 − $800 = $90. In other words, the call seller must deliver a stock worth $890 for an exercise price of only $800. The investor’s net profit is negative at $21.50 − $90 = −$68.50. The call seller makes a loss whenever the value of the call at expiration is more than the initial premium received for writing the option. In other words, he loses if the stock price is above $800 + $21.50 = $821.50. b. The put seller receives $84.00 for writing the put. If the stock price at expiration is $740, the final value of the put is $800 − $740 = $60. In other words, the put seller must pay an exercise price of $800 for a stock worth only $740. The investor’s net profit is $84.00 − $60 = $24.00. If the stock price is $890, the put expires valueless and the put seller keeps the entire $84.00 as a profit. The put seller makes a loss when the value of the put at expiration is greater than the initial premium received for writing the option. In other words, he loses if the stock price is below $800 − $84 = $716.
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