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

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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