Question

# You buy a call option and buy a put option on bond X. The strike price...

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 \$ .

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 = 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 = 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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