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

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Trading strategy called profitmania is created by taking below calls in the table calls strike price...
Trading strategy called profitmania is created by taking below calls in the table calls strike price premium 2 long call k1 c1 1 short put k2 p2 1 long put k3 p3 K1 < k2 < k3 is the strike price condition Please express the break-even stock prices using and
Consider three calls on the same stock (that pays no dividends)  that differ only in their strike...
Consider three calls on the same stock (that pays no dividends)  that differ only in their strike prices. The strike prices are K1=35<K2=40<K3=45 (K1 is the smallest and K3 the largest). Now define w=(K3-K2)/(K3-K1) and consider the portfolio of w long positions in the K1 strike , (1-w) positions in the K3 strike, and one short position in the K2 strike. Does this portfolio look like anything you might know? Can you rank wC(K1)+(1-w)C(K3) and C(K2)? You are informed that the...
Consider an option combination created by a long put with strike price K1 and two long...
Consider an option combination created by a long put with strike price K1 and two long calls at strike price K2 where K1 < K2. Create a payoff table for this combination.
A synthetic short sale is created with a long put and a short call with the...
A synthetic short sale is created with a long put and a short call with the same strike price and expiration dates. Bank of America stock is currently trading at $21.71 per share. A May $25 call is trading at $2.75 and a May $25 put is currently trading at $2.25. Evaluate the payoffs of a short sale of BOA and the synthetic short sale at prices of $18, $25 and $28. Don’t forget the premiums on the options in...
Construct a long strap using the 170 strike options. Identify the break-even prices? The options for...
Construct a long strap using the 170 strike options. Identify the break-even prices? The options for Microsoft (stock price $165.13) are trading at the following prices: Strike     Call        Put $165       $8.10      $6.75 $170       $3.25      $7.50 $142 and 177 $142 and 179 $156 and 177 $156 and 179
An options exchange has a number of European call and put options listed for trading on...
An options exchange has a number of European call and put options listed for trading on ENCORE stock. You have been paying close attention to two call options on ENCORE, one with an exercise price of $52 and the other with an exercise price of $50. The former is currently trading at $4.25 and the latter at $6.50. Both options have a remaining life of six months. The current price of ENCORE stock is $51 and the six-month risk free...
Suppose you are given the following prices for the options on ABC stock: Strike (in $)                ...
Suppose you are given the following prices for the options on ABC stock: Strike (in $)                 call                  put 15.0                             1.6                   2.0 17.5                             1.2                   2.5 20.0                             0.9                   3.2 Suppose you take the following position: long one call with strike 15.0, short two calls with strike 17.5, and long one call with strike 20.0. Please draw the payoff at maturity. What would be the total gain (loss) on the above position if the stock price at maturity turned out to be...
Suppose you are given the following prices for the options on ABC stock: Strike (in $)                ...
Suppose you are given the following prices for the options on ABC stock: Strike (in $)                 call                   put 15.0                             1.6                   2.0 17.5                             1.2                   2.5 20.0                             0.9                   3.2 Suppose you take the following position: long one call with strike 15.0, short two calls with strike 17.5, and long one call with strike 20.0. Please draw the payoff at maturity.                                                      What would be the total gain (loss) on the above position if the stock price at maturity turned out to be...
One popular combination is the strip, which involves buying a call and two puts with the...
One popular combination is the strip, which involves buying a call and two puts with the same expiration date and strike prices. A three month call with strike of $60 costs $4. A three month put with the same strike price costs $3. Do you have to pay to initiate the sale of a strip involving the above two options? For what range of stock prices at expiration would a short position in the strip above lead to a loss?...
One popular combination is the strip, which involves buying a call and two puts with the...
One popular combination is the strip, which involves buying a call and two puts with the same expiration date and strike prices. A three month call with strike of $60 costs $4. A three month put with the same strike price costs $3. Do you have to pay to initiate the sale of a strip involving the above two options? For what range of stock prices at expiration would a short position in the strip above lead to a loss?...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT