Question

Suppose you construct the following European option trades on Apple stock: write a put option with exercise price $33 and premium $1.57, and write a call option with exercise price $33 and premium $4.29. What is your maximum dollar net profit, per share?

Answer #1

The strategy of simultaneous selling of call and put option of same underlying stock, strike price and expiration date is called short straddle. It is a limited profit and unlimited risk strategy used by traders used by traders when they think that the underlying stock would experience very little price movements.

Here the trader would achieve maximum profit when the price of underlying stock = Strike price of call/put.

Maximum profit for Trader would be premium received while writing put and call option.

Therefore maximum dollar net profit per share would be $1.57+ $4.29 i.e $5.86

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Suppose you construct the following European option trades on
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1. Tucker Inc. common stock currently trades for $90/share.
6-month European put options on the stock have an exercise price
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e....

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at a given price (called the exercise price) at a particular point
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bond.
C) Since both the call and the put are risky assets, the
risk-free interest rate...

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by 10%.
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