Question

Can I get the steps please on how to solve it

Both a call and a put currently are traded on stock XYZ; both have strike prices of $47 and maturities of six months. What will be the profit to an investor who buys the call for $3 in the following scenarios for stock prices in six months? (a) $40; (b) $45; (c) $50; (d) $55; (e) $60. What will be the profit in each scenario to an investor who buys the put for $5?

Answer 1

Ans: When we buy call option for $ 3.

Profit = Exercise price - strike price - premium

(a) $ 40 , it is not exercised , loss = $ 3

(b) 45, it is not exercised loss = $3

(c) 50 , 50-47-3 = 0

(d) 55 , 55-47-3 = 5

(e) 60 , 60 - 47 -3 = 10

When we buy put option for $ 5

Profit = - Exercise price + strike price - premium

(a) $ 40 , 47 - 40 - 5 = 2 , profit

(b) 45, 47 - 45 - 5 = -2 loss

(c) not exercised , loss = 5

(d) not exercised, loss = 5

(e) not exercised , loss = 5