Question

Please explain your answer.

1. Suppose you short one IBM May 100 put contract at $5 and long one IBM 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

PART 1

Price	$          20	$          40	$          60	$          80	$        100	$        105	$        120	$        140	$        160
SHORT IBM PUT
Premium	$             5	$             5	$             5	$             5	$             5	$             5	$             5	$             5	$             5
Loss/Profit	$         -80	$         -60	$         -40	$         -20	$           -	$           -	$           -	$           -	$           -
LONG IBM PUT
Premium	$           -2	$           -2	$           -2	$           -2	$           -2	$           -2	$           -2	$           -2	$           -2
Loss/Profit	$          85	$          65	$          45	$          25	$             5	$           -	$           -	$           -	$           -
Profit/ Loss	$             8	$             8	$             8	$             8	$             8	$             3	$             3	$             3	$             3

Maximum Profit = $8 x100 =800

The correct answer is none of the above

PART 2

Price	$          20	$          40	$          60	$          80	$        100	$        105	$        120	$        140	$        160
LONG IBM PUT
Premium	$           -5	$           -5	$           -5	$           -5	$           -5	$           -5	$           -5	$           -5	$           -5
Loss/Profit	$          80	$          60	$          40	$          20	$           -
SHORT IBM PUT
Premium	$             2	$             2	$             2	$             2	$             2	$             2	$             2	$             2	$             2
Loss/Profit	$         -85	$         -65	$         -45	$         -25	$           -5	$           -	$           -	$           -	$           -
Profit/ Loss	$           -8	$           -8	$           -8	$           -8	$           -8	$           -3	$           -3	$           -3	$           -3

Maximum loss of = -$8 x 100 =-800

The corrrect answe is option B i.e. loss of $800

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