More Complicated Model
A call option gives the holder the right to buy 100 shares at a fixed price E
A put option gives the holder the right to sell 100 shares at a fixed price E
pay off of an option is determined by cost C and current share price S
e.g. call cost $200 exercise $300
- stock price $2, don’t exercise payoff = -$200
- stock price $7, exercise payoff = $200