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 |
| Put option | 80 | 125 |
Not exercisable since price at expiry is greater than strike price (125>80) |
0 |
| 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 |
| Total payoff | -25 |
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