Question

-Suppose the underlying stock is priced at $23.5, you perform the following 4 options trades: Buy a call option with strike price of 27.5 at $1.5 Sell a call option with strike price of 25 at $2 Buy a put option with strike price of 20 at $1.5 Sell a put option with strike price of 22.5 at $1.5 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	27.5	Not Exercise	-1.5
Call Seller	23.5	25	Not Exercise	1.5
Put Buyer	23.5	20	Not Exercise	-1.5
Put Seller	23.5	22.5	Not Exercise	1.5

Call Buyer will Exercise if Strike Price < CMP but in both the cases Strike Price is more than CMP hence he will not exercise and there will be a loss of $ 1.5 to call buyer and gain of $ 1.5 to Call Seller.

Put Buyer will Exercise if Strike Price > CMP but in both the cases Strike Price is less than CMP hence he will not exercise and there will be a loss of $ 1.5 to Put buyer and gain of $ 1.5 to Put Seller.

Therefore, the best stratergy to opt is of call seller and put seller in the given situation which would lead to a gain of $3.