Question

Suppose that put options on a stock with strike prices $33 and $40 cost $2 and $5, respectively.

a What are the breakeven points?

b. At what range of future stock prices will the spread make profit and loss.

Answer 1

1.a. Break even point of put option would be the strike price of put option which will be deducted by the premium paid.

Break even point of $ 33 strike price put option

=(33-2)= 31

Break even point of $ 40 strike price put option

= (40-5)= 35

2. Range of future stock prices which will be making profit and loss would be-- below 31 will be resulting into profits for a strike price of 31,and below 35 will be resulting into profit for strike price of 40.

When the market price will go above 35, it will be resulting into loss for strike price of 33, and when the market price will be going above 45 , it would be resulting into loss for strike price of 40.