Question

# The current price of Stock A is \$305/share. You believe that the price will change in...

The current price of Stock A is \$305/share. You believe that the price will change in the near future, but your are not sure in which direction. To make a profit from the price change, you purchase ONE call option contract (each contract has 100 calls) and TWO put option contracts (each contract has 100 puts) at the same time. The call option and the put option have the same expiration date. The strike price of the call option is \$310, and the premium is \$3.10 per call. The strike price of the put option is \$300, and the premium is \$8.30 per put.

If the stock price increases to \$315/share on the expiration date, what is the payoff of your portfolio? What is the profit of your portfolio?

Note that payoff and profit are different calculations.

Payoff from Call Option = Spot Price - Strike Price

Payoff from Call Option = 315 - 310

Payoff from Call Option = \$5

Pay off from 100 call options = \$500

Payoff from Put Option = put option will not be exercised because the market price is greater than strike price

Thus Payoff from Portfolio = \$500

Profit from portfolio = Payoff - Premiums Paid

Profit from portfolio = 500 - 100 * 3.10 - 8.30 * 200

Profit from portfolio = -1470

There will be loss from the designed strategy

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