Draw a payoff diagram

You own a put option on Ford stock with a strike price of $10. When you bought the put, its cost to you was $2. The option will expire in exactly six months’ time.

a. If the stock is trading at $8 in six months, what will be the payoff of the put? What will be the profit of the put?

b. If the stock is trading at $23 in six months, what will be the payoff of the put? What will be the profit of the put?

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

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

Solution: