Question

Suppose a stock is trading at $4 in July.

An options trader executes a spread by selling an

August put with strike $30 for $50, buying an August put with strike $40 for $300, buying an

August call with strike $40 for $300 and selling an August call with strike 50 for $50.

Write the payoff function of the spread and provide the corresponding diagram. Write a

paragraph discussing if the spread provides a limited/unlimited profit potential and possible

corresponding risks.

trading at 4.

can you please answer the question as is?

Answer 1

Stock price ($)	4
Time period (month)	1

1) A put is in-the-money when Stock price is less than strike price.

2) A call is in-the-money when stock price is greater than strike price.

Cost ($)	+50	-300	-300	+50
Strike prices ($)	30	40	40	50
Stock price at expiration	Payoff from short put	Payoff from long put	Payoff from long call	Payoff from short call	Cost	Net Payoff
<30	-(30-St)	40-St	0	0	-500	-490
30-40	0	40-St	0	0	-500	-(460+St)
40	0	0	0	0	-500	-500
40-50	0	0	St-40	0	-500	-540+St
>50	0	0	St-40	-(St-50)	-500	-490