Question

# Set-up for all parts: An investment strategy involves four stock options with the same expiration date...

Set-up for all parts: An investment strategy involves four stock options with the same expiration date but different strike prices. An example is the following: (i) write a call option with strike price 60, (ii) buy a call option with strike price 55, (iii) buy a put option with strike price 45, and (iv) write a put option with strike price 40.

OPTION STRATEGY (PART 1)

Using the table below, express the total payoffs of this strategy in terms of the price ST. Please fill up the total payoff of this strategy in the bottom row of the table.

Instructions: If some of your payoffs are related to ST , denote ST as S in your answer. That is, if the payoff is for example 10-ST , please type in "10-S" (no spaces between the characters).

A)

 0
 40< ST < 45
 45< ST < 55
 55< ST < 60
 60< ST
Write Call
Write Put
Total Payoff

B)

C) For which values of ST will the strategy make the highest profit?

1-

0-40

2-

4--45

3-

45-55

4-

55-60

5-

60+

 0

C)

At

1) 0-40 and 5) 60+ we have the highest profit = 5

Even in 40-45 we can have highest profit when S=40 and in 55-60 when S=60

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