Formulas for Payoff at Expiry

Formulas for Payoff at Expiry (Black-Scholes not required at/for expiry)

The PnL(S) column shows the formula for computing the outcome (payoff) at expiry for any stock price (S) you supply.

If you spot an error or want to make improvements/additions/extensions, let me know.
This is a WIP (work in progress).

ATTN: Non-programmers should not participate in this thread, as this is mostly interesting,
and is intended, for programmers only.

Code:

Formulas for Payoff at Expiry
(Black-Scholes not required at/for expiry)

Abbrevations:
  S         Stock Price
  S0        Initial Stock Price
  Pr0       Initial Option Premium (ie. the Option Price)
  K         Option Strike
  BEP       Break/Even Point (the stock price at which PnL is 0)
  PnL(S)    The formula for computing PnL for any S
  Infinity  means "unlimited"

                Type       NetPr       MinPnL       MaxPnL        BEP         ProfitZone     PnL(S)
----------------------------------------------------------------------------------------------------------------------------------------
LongStock       Bullish    -S0         -S0          +Infinity     S0          BEP.right      S

ShortStock      Bearish     S0         -Infinity     S0           S0          BEP.left       S

LongCall        Bullish    -Pr0        -Pr0         +Infinity     K + Pr0     BEP.right      max(S - K - Pr0, -Pr0)

ShortCall       Bearish     Pr0        -Infinity     Pr0          K + Pr0     BEP.left       min(K - S + Pr0,  Pr0)

LongPut         Bearish    -Pr0        -Pr0          K - Pr0      K - Pr0     BEP.left       max(K - S - Pr0, -Pr0)

ShortPut        Bullish     Pr0        -K + Pr0      Pr0          K - Pr0     BEP.right      min(S - K + Pr0,  Pr0)

CoveredCall     Bullish    -S0 + Pr0    NetPr        K - Pr0      S0 - Pr0    BEP.right      S < 0.0 ? MinPnL : S > K ? MaxPnL : MinPnL + S
(= LS + SC)

CashSecuredPut  Bullish    -K  + Pr0    NetPr        K - Pr0      K  - Pr0    BEP.right      S < 0.0 ? MinPnL : S > K ? MaxPnL : MinPnL + S
(= SP + Cash)

 

When I was in finance class, we had to draw the combinations-payoff. Wonderful days

 

The following pseudocode is equivalent to "PnL = S < 0.0 ? MinPnL : S > K ? MaxPnL : MinPnL + S" :

Code:

if (S < 0.0)
  PnL = MinPnL
else if (S > K)
  PnL = MaxPnL
else
  PnL = MinPnL + S

 

To get the PnL for S=S0 one would make this call:
PnL = PnL(S0)
And from that result one can calculate PnL% etc.:
PnL% = PnL / abs(NetPr) * 100
(does make sense only for strategies where NetPr is negative, for example CC and CSP)

The posted formulas can be used for scanning option chain tables: to find good trades in the data.

 

The best way to determine payoffs at expiry is to use numerical methods combined with machine learning.

 

What a BS!
My posted payoff formulas are exact formulas, nothing can be more exact than these!

Here are other examples that do similar by using the same payoff formulas (or similar payoff formulas giving the same result):
https://www.macroption.com/call-option-payoff/
I have verified my results with that site as well with Black-Scholes. All 3 give the same result.

This is my test program for verifying the 3 results for the LC, SC, LP, SP:
the calc_BSM() function is not posted, you can use your own.

Code:

int payoff_tests()
  { // compares 3 different formulas: 1=BSM, 2=my, 3=www.macroption.com

    const double S0 = 120, DTE = 365, IV = 300, rPct = 0, qPct = 0;
    const double Step = 1.0;

    size_t c = 0;

    for (int ifC = 1; ifC >= 0; --ifC)
    for (int ifL = 1; ifL >= 0; --ifL)
    for (double K = S0 * 0.25; K <= (S0 * 1.75); K += Step)
      {
        const TSCP   CP0 = calc_BSM(S0, K, DTE / gPar.DaysInYear, IV / 100, rPct / 100, qPct / 100);
        const double Pr0 = ifC ? CP0.C : CP0.P;
    
        for (double S = S0 * 0.1; S <= (S0 * 1.9); S += Step)
          {
            ++c;
      
            const TSCP   CP = calc_BSM(S, K, 0.0, IV / 100, rPct / 100, qPct / 100);         // t=0 ist OK
            const double Pr = ifC ? CP.C : CP.P;

            double y1 = 0, y2 = 0, y3 = 0;

            if (ifC && ifL)
              {
                y1 = -Pr0 + Pr;
                y2 = max(S - K - Pr0, -Pr0);
                y3 = max(S - K, 0.0) - Pr0;
              }

            if (ifC && !ifL)
              {
                y1 = Pr0 - Pr;
                y2 = min(K - S + Pr0,  Pr0);
                y3 = Pr0 - max(0.0, S - K);
              }

            if (!ifC && ifL)
              {
                y1 = -Pr0 + Pr;
                y2 = max(K - S - Pr0, -Pr0);
                y3 = max(K - S, 0.0) - Pr0;
              }

            if (!ifC && !ifL)
              {
                y1 = Pr0 - Pr;
                y2 = min(S - K + Pr0,  Pr0);
                y3 = Pr0 - max(0.0, K - S);
              }


            const bool fDiff = cmp(y1, y2) || cmp(y2, y3);
            if (!fDiff) continue;            
        
            printf("ERROR: RESULTS DIFFER: fC=%d fL=%d S0=%-8.4lf IV=%.2lf K=%-8.2lf Sx=%-8.2lf : y1=%-8.4lf y2=%-8.4lf y3=%-8.4lf\n",
                                           ifC,  ifL,  S0,        IV,      K,        S,           y1,        y2,        y3);
            return 1;
          }
      }
    printf("c=%zu : ALL OK\n", c);

    return 0;
  }

 

They flys will tell you everything

 

What do you mean?

 

In your OP, it's obvious you don't know how to handle infinity. With my superior math skills, let me give you some basic instruction on infinity:

infinity + infinity = two-finity

infinity - infinity = no-finity

Got it? Good. You can take it from here.