Question

In: Economics

Read the following excerpt and draw a profit diagram based on the option positions. Show all...

Read the following excerpt and draw a profit diagram based on the option positions. Show all the critical points on the diagram. For example, the intercepts on axes, maximum profit or maximum loss.

Shares of a gold producer rose 1.5% today to yet another all-time high of $116.43. We observed activity in the June 2012 contract by one investor who initiated an option strategy on the stock. It appears the trader purchased 13,265 calls at the June $125 strike for an average premium of $5.95 each, against the sale of the same number of calls at the higher June $150 strike for $2.10 apiece…

Please provide formula and calculation step thanks

Solutions

Expert Solution

This is how we calculate the payoffs.

Formula IF(Price on expiry<=125,-13265*5.95,-13265*5.95+(Price on expiry-125)*13265) IF(Price on expiry<=150,+13265*2.10,+13265*2.10-(Price on expiry-150)*13265)
A B A+B
Price on expiry Payoff from call bought Payoff from call sold Total Payoff
116.43 -78926.75 27856.5 -51070.3
120 -78926.75 27856.5 -51070.3
121 -78926.75 27856.5 -51070.3
122 -78926.75 27856.5 -51070.3
123 -78926.75 27856.5 -51070.3
124 -78926.75 27856.5 -51070.3
125 -78926.75 27856.5 -51070.3
126 -65661.75 27856.5 -37805.3
127 -52396.75 27856.5 -24540.3
128 -39131.75 27856.5 -11275.3
129 -25866.75 27856.5 1989.75
130 -12601.75 27856.5 15254.75
131 663.25 27856.5 28519.75
132 13928.25 27856.5 41784.75
133 27193.25 27856.5 55049.75
134 40458.25 27856.5 68314.75
135 53723.25 27856.5 81579.75
136 66988.25 27856.5 94844.75
137 80253.25 27856.5 108109.8
138 93518.25 27856.5 121374.8
139 106783.25 27856.5 134639.8
140 120048.25 27856.5 147904.8
141 133313.25 27856.5 161169.8
142 146578.25 27856.5 174434.8
143 159843.25 27856.5 187699.8
144 173108.25 27856.5 200964.8
145 186373.25 27856.5 214229.8
146 199638.25 27856.5 227494.8
147 212903.25 27856.5 240759.8
148 226168.25 27856.5 254024.8
149 239433.25 27856.5 267289.8
150 252698.25 27856.5 280554.8
151 265963.25 14591.5 280554.8
152 279228.25 1326.5 280554.8
153 292493.25 -11938.5 280554.8
154 305758.25 -25203.5 280554.8
155 319023.25 -38468.5 280554.8
156 332288.25 -51733.5 280554.8
157 345553.25 -64998.5 280554.8
158 358818.25 -78263.5 280554.8
159 372083.25 -91528.5 280554.8
160 385348.25 -104793.5 280554.8
161 398613.25 -118058.5 280554.8
162 411878.25 -131323.5 280554.8
163 425143.25 -144588.5 280554.8
164 438408.25 -157853.5 280554.8
165 451673.25 -171118.5 280554.8
166 464938.25 -184383.5 280554.8
167 478203.25 -197648.5 280554.8
168 491468.25 -210913.5 280554.8
169 504733.25 -224178.5 280554.8
170 517998.25 -237443.5 280554.8

And we can show the payoff as per the following graph


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