Question

Suppose you are an options trader. You have recently sold two contracts of puts on a stock that is currently selling at $27.50. The exercise price on the puts is $25.00. You also buy three contracts of calls on the same stock that has an exercise price of $24.00. The premium on the call is $.85 per option while the premium on the put is $2.00 per option. If, at expiration, the stock price is $28.31, what is your combined profit or loss on the combination?

Answer 1

For the 2 put options sold,

the short position is bullish on the stock price and assumes it will rise. However, his profit is limited to the premiums collected on selling the put option.

So, in this case, his payoff for the put option written = 2 * $2 = $4.

For the 3 call option contract purchased,

Again, the long position in call is bullish on the stock price. His payoff is written mathematically as:

Payoff = [Max(0, Stock Price - Strike Price)] - Call premium

So, for our question, Payoff = [Max(0, 28.31 - 24)] - 0.85 = $3.46

This is per share payoff, for 3 contracts = 3 * $3.46 = $10.38

Combined profit/loss = $10.38 + $4 = $14.38