# Covered call / Protective put - VALUE AT EXPIRATION

I might got this completely wrong, but I cannot get one thing out of my head.

VALUE AT EXPIRATION. I got confused with reading 60. Why is the value at expiration sometimes the value of an option, while other times it is the value of the position or (ct/pt and Vt)?

CFA books practice problems at the end of reading 60 got me confused. (I know these questions might sound stupid, it’s just that I cannot get my head around this :) )

What is that that I am not getting?

Thank you!

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Further to my message, see below how CFA books define this:

c

_{0},c_{T}= price of the call option at time 0 and time Tp

_{0},p_{T}= price of the put option at time 0 and time T1and later…

…The value at expiration, c

_{T}, is c_{T}= max(0,S_{T}– X). …Value…Price?

The value of an option is what it should be worth; the price is what someone actually pays for it in the market. If it is priced fairly, price = value. If not, it may be overpriced (price > value) or underpriced (price < value).

As for the value of a covered call or a protective put at expiration, each is the value of the underlying at expiration (of the option) plus the value of the option at expiration.

These are best illustrated with examples. First, the covered call:

Suppose that you have a stock with a current market price of $100/share. You have a short position in a call option on that stock with a strike price of $120/share. We’ll compute the value of the covered call for various prices of the underlying stock at expiration. If the price of the stock at expiration is:

Next, the protective put:

Suppose that you have a stock with a current market price of $100/share. You have a long position in a put option on that stock with a strike price of $80/share. We’ll compute the value of the protective put for various prices of the underlying stock at expiration. If the price of the stock at expiration is:

Simplify the complicated side; don't complify the simplicated side.

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I think I will print this to add to my notes, THANK YOU VERY MUCH! (VERY MUCH)

Prego.

Simplify the complicated side; don't complify the simplicated side.

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when calculating the value of either the covered call or the protective put, should not I include the option premium received or paid?

Failure will never overtake me if my determination to succeed is strong enough!

No: sunk cost.

You would, however, include them in calculating the profit.

Simplify the complicated side; don't complify the simplicated side.

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Thanks, very helpful.

Failure will never overtake me if my determination to succeed is strong enough!

You’re quite welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

http://financialexamhelp123.com/