Three put options on a stock have the same expiration date and strike prices of $50, $60, and $70. The market prices are $3, $5, and $9, respectively. Lou buys the $50 put, buys the $70 put and sells two of the $60 puts. Lou's strategy potentially makes money (i.e. positive profit) in which of the following price ranges?
$40 to $50 |
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$55 to $65 |
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$85 to $95 |
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$70 to $80 |
1. Profit when Spot Price is 45
Buy $50 Put = $50 - $45 - $3 = $2
Buy $70 Put = $70 - $45 - $9 = $16
Sell $60 Put = $45 - $60 + $5 = -$10
Total Profit = $8
2. Profit when spot price is $60
Buy $50 Put = - $3
Buy $70 Put = $70 - $60 - $9 = $1
Sell $60 Put = $5
Total Profit = $3
3. Profit when spot price is $90
Buy $50 Put = - $3
Buy $70 Put = - $9
Sell $60 Put = $5
Total Profit = -$7
3. Profit when spot price is $75
Buy $50 Put = - $3
Buy $70 Put = - $9
Sell $60 Put = $5
Total Profit = -$7
Maximum profit will result when the spot price is between $40 to $50 Thus Option A is correct
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