Suppose you buy a stock, buy a put option with a strike price of $80 on the stock, and write a call option on the stock with a strike price of $100. What is the total payoff (not profit) if the stock price at expiration is $125?
A call option is an option of right to buy if price goes favorable that is price at expiry is greater than strike price.otherwise option will not be exercised.
A put option is an option of right to sell if price goes favorable that is price at expiry is less than strike price otherwise option will not be exercised.
|Option||Stike price||price at expiry||Exercisable or not||Payoff|
Not exercisable since price at expiry is greater than strike price (125>80)
|Call option written off (you sold a call option)||100||125||The buyer of call option will exercise the option since price at epxiry is greter than strike price (125>100)||100-125=-25|
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