Question

Q4. A trader longs a European call and shorts a European put option. The options have the same underlying asset, strike price and maturity. Please depict the trader’s position. Under what conditions is the value of position equal to zero? (Hint: compare the payoff pattern of the option position with that of a forward contract.)

Answer #1

**Break Even Price for the Position =**
**Strike Price-Premium Received on Writing Put+Premium Paid
for Buying Call**

**When the Price of Underlying at expiry will equal above
price, Trader's Position will be 0 i.e. No Profit No
Loss.**

**Cross Verification:**

Strike Price = 100, Call Premium = 2, Put Premium = 3

Breakeven = 100-3+2 = 99

If Price at Expiry is 99,

**Call** will be Lapsed and **Loss**
will be Premium Paid = 1-2 = **2**

**Put** will be Exercised by the Holder and
**Profit** will be (Strike Price-Price at
expiry)+Premium Received = (100-99)+3 = **2**

**Therefore, Net Profit/Loss = 0**

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