Question

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

1. 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.
2. What would be the total gain (loss) on the above position if the stock price at maturity turned out to be S(T) = 16 (taking into account the price of the options)?
3. Suppose you decide to buy a 15.0 straddle (1 long call + 1 long put with the same strike of 15.0). Please draw the payoff at maturity.
4. Over what range of underlying stock price (at maturity) will you lose money (after taking into account the price you paid for the options)?

Answer 1

a

b

Particulars	Payoff A	Premium B	Profit/(Loss) A-B
15 Strike Call (+One)	1.00	1.6	-0.60
17.5 Strike Call (-Two)	0.00	-2.4	2.40
20 Strike Call (+One)	0.00	0.9	-0.90
TOTAL	1.00	0.1	0.90

c

Price on Maturity	Long 15 Call	Long 15 Put	Total Payoff
10	0	5	5
11	0	4	4
12	0	3	3
13	0	2	2
14	0	1	1
15	0	0	0
16	1	0	1
17	2	0	2
18	3	0	3
19	4	0	4
20	5	0	5

d

TOTAL premium paid  

15 Strike Call = 1.5

15 Strike Put = 2

Total = 3.5

for profit price of the stock on maturity should be outside the range of

15 [+/- 3.5]

Upper Range = 15 + 3.5 = 18.5

Lower Range = 15 - 3.5 = 11.5