Question

Suppose you bought a call option for $3 with an exercise price of $50 and another call option for $2 with an exercise price of $60 per share. Draw a graph of the payout on the investment as a function of the stock price. Label the graph.

Answer 1

Given that two call options are bought, with $50 excercise price for $3 and $60 excercise price for $2. So, Total debit is $5.

Now, If the stock expires below $50, both options will be worthless and the total payoff will be -$5.

The position reaches its breakeven point when it expires at $55.

If the stock expires above $55, the payoff will be positive and will earn profit. and above $60, the profit rate will get doubled, as both options will earn profit

The upside will be unlimited for this position. Payout graph can be drawn as below: