Question

Show the followings are true through a graph in which the portfolio that is consists of long five calls at a strike price of 10 and seven short puts at a strike price of 20.

1. Positive for S>20

2.Negative for S<10

Answer 1

The payof chart can be drawn for the given options after making the payoff table as below;

Payoff chart
	=Max(S-10,0)	=Min(S-20,0)
Stock Prices ( S)	long call @ 10 strike price (Lc)	short put @20 strike(Sp)	Total Payoff (Lc*5+Sp*7)
0	0	-20	-140
2	0	-18	-126
4	0	-16	-112
6	0	-14	-98
8	0	-12	-84
10	0	-10	-70
12	2	-8	-46
14	4	-6	-22
16	6	-4	2
18	8	-2	26
20	10	0	50
22	12	0	60
24	14	0	70
26	16	0	80
28	18	0	90
30	20	0	100
32	22	0	110
34	24	0	120
36	26	0	130
38	28	0	140

The graph is obtained by using chart function in excel;

From the graph it can be seen that;

Payoff is ;

1. Positive for S>20

2.Negative for S<10