Question

A trader has the following portfolio:

1. Long 1-year put with strike $80

2.  Short 1-year call with strike $120

3. Long 1 share of stock. (Option contracts are for 1 share).

Assume that the price of the underlying asset is $100. Volatility is 20%, rate=1%, dividend yield 0%.

a. Calculate the value of the portfolio.

b. What would be the maximum gain that the trader could incur in a month? Explain how.

c. What would be the maximum loss the trader could have in 1 month? Explain.

Answer 1

a) Value of the portfolio is = $200

b) The investor can make a maximum of $20 for a year. Because for future contract there is 3 situation will happen 1 executed at the same price, below the price, and above the price. If the price is above the price of underlying asset is executed at $101.67. The difference $1.67 is the profit for a month.

c)Yes, volatility is 20%. so there is a change regarding this volatility so the loss is also equal to the profit because the year loss would be $20 and it's divided into the monthly basis to earn the answer. loss = $1.67