Question

1. You buy a share of Texaco stock for 60, and a six-month call option at 65 for 2.32. You sell a six month put option at 55 for 1.493. You hold your portfolio until the expiration date. On the expiration date you cash out your portfolio. Graph the profits of your strategy as the price of Texaco stock at the expiration date goes from 40 to 80. Profits equal the amount you receive at the expiration date for cashing out your portfolio minus the amount you paid for the portfolio.

Answer 1

Given that call option was bought for 2.32 and put option was sold for 1.493. So, Net proceeds will be -2.32+1.493= -0.827

If the stock expires at 40, pay off from put option will be -15 and call option expires worthless. So, Total payoff will be -15-0.827= -15.827

If the stock expires between 40 and 55, the total payoff ranges from -15.827 to -0.827

If the stock expires between 55 and 65, the total payoff remains constant at -0.827, as the call option still expires worthless

The total payoff will reach breakeven shen stock expires at 65+0.827= 65.827

If the stock expires between 65.827 and 80, total payoff ranges from 0 to 14.173

Below is the graph which shows the profit of the strategy and expiration of stock from 40 to 80.