Question

A trader conducts a trading strategy by selling a call option with a strike price of $50 for $3 and selling a put option with a strike price of $40 for $4. Please draw a profit diagram of this strategy and identify the maximum gain, maximum loss,  and break-even point. Hint: Write down a profit analysis matrix to help you draw the payoff lines.

Answer 1

K: strike price

Call option:

Premium received from short call = +3

Pay-off from call option = -max(S - K,0) = -max(S - 50, 0)

Put option

Premium received from short call = +4

Pay-off from call option = -max(K - S,0) = -max(40 - S, 0)

Spot Price	Premium Short call	Pay-off short call	Pay-off short call	Premium short put	Pay-off short put	Pay-off short put	Total payoff
25	3	-MAX(25-50,0)=	0	4	-MAX(40-25,0)=	-15	-8
30	3	-MAX(30-50,0)=	0	4	-MAX(40-30,0)=	-10	-3
35	3	-MAX(35-50,0)=	0	4	-MAX(40-35,0)=	-5	2
40	3	-MAX(40-50,0)=	0	4	-MAX(40-40,0)=	0	7
45	3	-MAX(45-50,0)=	0	4	-MAX(40-45,0)=	0	7
50	3	-MAX(50-50,0)=	0	4	-MAX(40-50,0)=	0	7
55	3	-MAX(55-50,0)=	-5	4	-MAX(40-55,0)=	0	2
60	3	-MAX(60-50,0)=	-10	4	-MAX(40-60,0)=	0	-3
65	3	-MAX(65-50,0)=	-15	4	-MAX(40-65,0)=	0	-8