For the first workout we have an option which has an exercise price of $75, a premium of $8. It's a call option and we are looking at the long side of this transaction. So, if the underlying stock price is $70 on the maturity date, since the underlying stock price is less than the exercise price, there's little point in the option being exercised and paying the $75 strike price to buy the underlying asset. So this long call option position will still experience the loss equal to the premium that they paid to buy the option. If the underlying stock price is $75 at expiration the same scenario will persist because whether we exercise the option or not will have no difference. If we can buy the underlying stock for $75 in the market or through the option there's no gain through using the option. However, if the underlying asset price goes up to $80 on the maturity date, we'll still have to pay the premium as the owner of the option but we will now also make a gain equal to the difference between the underlying asset price at maturity and the strike price.

We still end up in a loss making position overall but through exercising the option, we've made a gain of $5. We've paid $75 to buy the stock that's worth in this scenario, $80 which nets off against the premium paid of eight to give an overall loss of $3.

If the stock price at expiry goes up to $85 we will still, as with every scenario have paid the premium to buy the option but we'll make more of a gain. We'll make the $10 difference between the stock price and the exercise price. Under the scenario the call option owner has the opportunity to buy the asset for $75 if they exercise their option, even though the asset is worth $85 in the open market. Overall giving a gain of $2 as a $10 gain on expiration and an eight premium offsetting against that. The final scenario is if the stock price is $90, and again since the $90 stock price is higher than the exercise price for our call option, it makes sense to exercise the option. The premium will still be paid, but there'll be again on exercise of $15, the difference between the $75 strike price and the $90 underlying asset price. Give an overall gain of $7 on expiration. This workout looks at a put option where there is a short position currently held. The exercise price or strike price for this option is 50 and the premium is six. If the underlying stock price at expiration is $40, it is in the interest of the option owner to exercise their rights to deliver the stock and take receipt of the $50 strike price. This will result in a loss to the seller of the option equal to the difference between the value of the option they have taken delivery of and the price they had to pay for it of $50, giving a loss of $10. This will be offset to some degree though by the premium that they have received giving an overall payoff of a $4 loss. This nets off the $10 loss on exercise with the $6 premium received. If the underlying stock price is $45, again the owner of the option will choose to exercise it. The short side of the contract will have to take delivery of the underlying asset that is worth only $45 but have to pay 50 for it. But we'll have also received a premium of six giving an overall gain of $1, loss of five on expiration and six of premium netting off to a $1 gain. If the underlying asset price is 50 or higher the owner of the option will abandon it and the short position will just retain the premium of $6 which is the maximum gain that you can make if you are selling option contracts.