Question

1. Draw the following:

1. The gross payoffs(do not factor in the cost of the options) of buying 2 calls and one put, graph this over stock price(x) and payoff(y) space. Assume they have the same strike.
2. Draw the gross payoffs from shorting one call and one put, with the same strike
3. Explain which of these graphs must you pay to have these potential payoffs and which would you expect to receive money to take the associated payoff structure?

Answer 1

Assume Strike price = $80 (for plotting graph)

A. 2 long call + 1 long put position graph:

B. 1 Short call + 1 Short put position graph:

C. Long call + Long put graph is one in which an investor shall have to pay money (option cost) to earn the payoffs whereas, the short call + short put position is the one in which an investor shall receive money.