Question

A 3-month call option on a stock trades at $4.00. A 3-month put option on the same stock trades at $1.50. The current stock price is $40 and the strike price for both options is $38. Assume you buy one call and one put option. Create a table of profits at maturity of the call, the put and the combined position. Use price range of $20 to $50 in increments of $5.

Answer 1

As we are long on both the options, we are holding a straddle position.

First of all let's understand the straddle position:

Long call:

• Exercised when spot price > exercise price
  • Payoff = Spot - Exercise
  • Profit = payoff- premium
• Not exercised when spot price < exercise price
  • Payoff = 0
  • Profit = payoff- premium

Long put:

• Exercised when spot price < exercise price
  • Payoff = Exercise - Spot
  • Profit = payoff- premium
• Not exercised when spot price > exercise price
  • Payoff = 0
  • Profit = payoff- premium
• Total profit = call profit + put profit
• Based on this we can create a data table for various price levels:

Long Call	Long Put
Spot price	Exercise price	Premium	Spot price	Exercise price	Premium		Remark
	38	4		38	1.5
	Payoff	Profit		Payoff	Profit	Total Profit
20	0	0-4=-4	20	38-20 = 18	18-1.5=16.5	16.5-4=12.5	Call is not exercised, Put is exercised
25	0	0-4=-4	25	38-25= 13	13-1.5=11.5	11.5-4=7.5	Call is not exercised, Put is exercised
30	0	0-4=-4	30	38-30=8	8-1.5= 6.5	6.5-4=2.5	Call is not exercised, Put is exercised
35	0	0-4=-4	35	38-35=3	3-1.5=1.5	1.5-4=-2.5	Call is not exercised, Put is exercised
40	40-38 = 2	2-4= -2	40	0	0.-1.5=-1.5	-2-1.5=-3.5	Put is not exercised, Call is exercised
45	45-38 = 7	7-4=3	45	0	0.-15=-1.5	3-1.5=1.5	Put is not exercised, Call is exercised
50	50-38 = 12	12-4=8	50	0	0.-15=-1.5	8-1.5=6.5	--Put is not exercised, Call is exercised