Question

What is the maximum profit / loss and break-even for the following option trades? Buy 1...

  1. What is the maximum profit / loss and break-even for the following option trades?
    1. Buy 1 XYZ 30 Call @ 2.50
    2. Sell 1 XYZ 25 Call @ 4.00
    3. Buy 1 XYZ 40 Put @ 5.50
    4. Sell 1 XYZ 30 Put @ 2.00
  2. What is the maximum profit / loss and break-even for the following option spread trades?
    1. Long 100 XYZ @ 42.50 / Sell 1 XYZ 45.00 Call @ 2.00
    2. Long 100 XYZ @ 52.50 / Sell 1 XYZ 55.00 Put @ 4.00
    3. Buy 1 XYZ 40.00 Call @ 2.50 / Buy 1 XYZ 40.00 Put @ 1.75
    4. Buy 1 XYZ 50.00 Call @ 5.00 / Sell 1 XYZ 60.00 Call @ 1.50
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Answer #1

1)

Call Option For Seller/Writer For Buyer/Holder
Maximum Profit Premium Unlimited
Maximum Loss Unlimited Premium
Breakeven Exercise Price+Premium Exercise Price+Premium
Put Option For Seller/Writer For Buyer/Holder
Maximum Profit Premium Exercise Price-Premium
Maximum Loss Exercise Price-Premium Premium
Breakeven Exercise Price-Premium Exercise Price-Premium

Accordingy,

a)

Maximum Loss = $2.5

Maximum Profit = Unlimited

Break Even = 30-2.5 = $27.5

b)

Maximum Loss = Unlimited

Maximum Profit = $4

Break Even = 25-4 = $21

c)

Maximum Loss = $5.5

Maximum Profit = 40-5.5 = $34.5

Break Even = 40-5.5 = $34.5

d)

Maximum Loss = 30-2 = $2

Maximum Profit = $2

Break Even = 30-2 = $28

NOTE: As per GUIDELINES, we are supposed to answer ONLY 1 QUESTION & 4 SUB QUESTIONS.

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