Question

Consider a portfolio consisting of a long position in one stock and a short position
in two call options. Both the current stock price (S0) and the exercise price (K) of call options
are $20. The call option costs $3.
a) Construct a table showing the payoffs and net profits for all possible price ranges.
b) Draw a diagram showing the variation of an investor’s net profit with the terminal stock
price
c) For what price range does this portfolio provide a net positive return?
d) What is the maximum amount of profit that can be obtained?

Answer 1

3) Price Range from 15 to 25 provide positve return

4) Maximum Profit = 6