Question

Three put options on a stock have the same expiration date and strike prices of $50,...

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

$55 to $65       

$85 to $95     

$70 to $80    

Homework Answers

Answer #1

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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