Question

A trading strategy called INVE3000 strategy, is created by taking two long calls (with strike K1,...

A trading strategy called INVE3000 strategy, is created by taking two long calls (with strike K1, premium C1), one short put (with strike K2 and premium P2), and one long put (with strike K3 and premium of P3). We know that K1 < K2 < K3. Please express the break-even stock prices using K1, K2, K3 and C1, P2, P3.

Homework Answers

Answer #1

Break-Even Stock Prices:

Break-even referes to the point where there is no profit and no loss, which means total expenses will be equal to the total revenue.

For a Call Option, Break-even Price is given as:

BreakEven Call = Strike Price + Premium

For a Put Option, Break-even Price is given as:

BreakEven Put = Strike Price - Premium

Given: INVE3000 strategy

Two long calls (with strike K1, premium C1),

BreakEven Call = Strike Price + Premium

BreakEven Call = K1+C1

One short put (with strike K2 and premium P2),

BreakEven Put = Strike Price - Premium

BreakEven Put = K2-P2

One long put (with strike K3 and premium of P3).

BreakEven Put = K3-P3

Hence, the Break-even stock Prices are - K1+C1, K2-P2, K3-P3

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