Question

2-Suppose the underlying stock is priced at $23.5, you perform the following 4 options trades: Buy a call option with strike price of 20 at $2.5 Sell a call option with strike price of 22.5 at $1.75 Sell a call option with strike price of 25 at $1.25 Buy a call option with strike price of 27.5 at $1 Draw the net payoff diagram of the strategy and explain in what direction of the market this strategy will be profitable?

Answer 1

CMP= $ 23.5

	CMP(in $)	Strike Price(in $)	Decision	Profit/Loss
Call Buyer	23.5	20	Exercise	3.5-2.5=1
Call Seller	23.5	22.5	Exercise	1.75+1=2.75(loss)
Put Buyer	23.5	25	Exercise	1.5-1.25=0.5
Put Seller	23.5	27.5	Exercise	4+1=5 (loss)

Call Buyer will Exercise if Strike Price < CMP.  In both the cases Strike Price is less than CMP hence he will exercise and there will be a Gain of $ 1 to call buyer and loss of $ 2.75 to Call Seller.

Put Buyer will Exercise if Strike Price > CMP . In both the cases Strike Price is more than CMP hence he will exercise and there will be a gain of $ 0.5 to Put buyer and loss of $ 5 to Put Seller.

Therefore, the best stratergy to opt is of call Buyer and put Buyer in the given situation which would lead to a gain of $1.5.