Question

Please explain your answer.

1. Suppose you short one WFM May 100 put contract at $5 and long one WFM May 105 put contract at $2.

Your maximum profit/loss from your strategy would be

Multiple Choice

• gain of $200.

• loss of $300.

• loss of $200

• gain of $300.

• None of the above.

2. Suppose you purchase one WFM May 100 put contract at $5 and write one WFM May 105 put contract at $2.

The maximum potential profit/loss per contract of your strategy will ________, if both options are exercised.

Multiple Choice

• gain of $600

• loss of $800

• gain of $200

• loss of $300

• None of the above

Answer 1

1. Premium for short put option is $500

Premium for long put option is $ 200

As the investor writes put option the maximum gain will be $500 which is the cost of premium.

As he purchases the put option maximum loss will be the premium paid which is $ 200.

Therefore the maximum gain will $300

2. In this case the investor purchases one WFM May 100 at the premium of $5. So, $500 will be the cost of premium which will be maximum loss that he need to bear if he holds that option.

He also writes the option at the premium of $2. So he receives premium of $200 which will be the maximum gain that he enjoys.

So to the net effect, $300 will be the maximum loss will be $300