Setup 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 S_{T}. 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 S_{T ,} denote S_{T} as S in your answer. That is, if the payoff is for example 10S_{T ,} please type in "10S" (no spaces between the characters).
A)






Write Call  
Buy Call  
Buy Put  
Write Put  
Total Payoff 
B)
C) For which values of S_{T} will the strategy make the highest profit?
1
040
2
445
3
4555
4
5560
5
60+
0<ST< 40  40< ST < 45  45< ST < 55  55< ST < 60  60< ST  
Strike price 60  Write Call  0  0  0  0  60S 
Strike price 55  Buy Call  0  0  0  S55  S55 
Strike price 45  Buy Put  45S  45S  0  0  0 
Strike price 40  Write Put  S40  0  0  0  0 
Total Payoff  5  45S  0  S55  5 
C)
At
1) 040 and 5) 60+ we have the highest profit = 5
Even in 4045 we can have highest profit when S=40 and in 5560 when S=60
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