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