Question

You buy a call option and buy a put option on bond X. The strike price of the call option is $90 and the strike price of the put option is $105. The call option premium is $5 and the put option premium is $2. Both options can be exercised only on their expiration date, which happens to be the same for the call and the put.

If the price of bond X is $100 on the expiration date, your total payoff is $ and then total profit from the options portfolio is $ .

Answer #1

Call option gives the long the right to buy the option at the strike price. Call option is exercised when the spot price > Strike price.

- Payoff = Spot- Strike
- Payoff = 100-90
- Payoff = 10

- Profit = Payoff- premium
- Profit = 10-5
- Profit = 5

Put option gives the long the right to sell the option at the strike price. Put option is exercised when the spot price < Strike price.

- Payoff = Strike - Spot
- Payoff = 105-100
- Payoff = 5

- Profit = Payoff- premium
- Profit = 5-2
- Profit = 3

- Total payoff = Call payoff + put payoff
- Total payoff = 10+5
- Total payoff = 15

- Total profit = Call profit+ put profit
- Total profit = 5+3
- Total profit= 8

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