Question

Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The market prices are $3, $5, and $8, respectively. Alice buys the $55 put, buys the $65 put and sells two of the $60 puts. For what range of stock prices would this trade lead to a loss?

		greater than $64 or less than $55.
		greater than $64 or less than $56.
		greater than $65 or less than $56.
		greater than $65 or less than $55.

Answer 1

The correct option is the last one" Greater than 65 or less than 55.

The maximum profit will be if the stock price remains stationary. If the stock price moves above 65, then all option expires as they are put option and gains in value when stock price falls. As as all option expires, the initial outflow is the maximum loss.

As price of stock falls below 55, them all options activated and two short put options will eat up the profit of two long put options.