Question

Draw the payoff diagram for the following position: (i) long one
25-strike call, (ii)short two 30-strike calls, (iii) long one
35-strike call. Assume all options have the sameunderlying and the
same time to expiration. Be sure to label the axes of your
graph.**Briefly explain how these options combine to form the
payoff diagram that you drew**

Answer #1

Call Option:

Holder of call option will have right to buy underlying asset at
the agreed price ( Strike Price). As he is receiving right, he
needs to pay premium to writer of call option.He will exercise the
right, when expected spot price > Strike Price. Then writer of
option has to sell at the strike Price.

First Call :

Our Position - Holder

Qty - 1

We will not exercise the option until it reaches 25. AFter 25, Each 1$ inc in future price will lead to 1$ increase in Payoff.

Second Call:

Our Position - Writer.

Holder of option will not exercise the option until it reaches 30. AFter 30, Each 1$ inc in future price will lead to 1$ Decrease in Payoff.

As we have written two options, Value shall be multiplied with 2

Third Call:

We will not exercise the option until it reaches 35. AFter 35, Each 1$ inc in future price will lead to 1$ increase in Payoff.

FSP |
VC ( Strike Price
25) |
Vc ( Strike Price 30) - 2
Options |
Vc (Strike Price 35
) |
Total
Payoff |

$ 15.00 | $ - | $ - | $ - | $ - |

$ 20.00 | $ - | $ - | $ - | $ - |

$ 25.00 | $ - | $ - | $ - | $ - |

$ 30.00 | $ 5.00 | $ - | $ - | $ 5.00 |

$ 35.00 | $ 10.00 | $ -10.00 | $ - | $ - |

$ 40.00 | $ 15.00 | $ -20.00 | $ 5.00 | $ - |

$ 45.00 | $ 20.00 | $ -30.00 | $ 10.00 | $ - |

$ 50.00 | $ 25.00 | $ -40.00 | $ 15.00 | $ - |

Payoff Diagram:

X - Axis : Future Spot Price

Y- Axis = Payoff

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