Question

The current price of the stock is $160. The put option price for these shares with an exercise price of 150 is $7 and the call option price is also $7 for those shares with the same maturity and exercise price of 180. · put option 1 for a week contract and call option contracts to purchase shares when selling answer the following questions.

1) In the expiry of the option, print out the gains and losses resulting from the above strategy.

2) Calculate the maximum profit and the maximum loss size and determine the range of share prices that occur respectively.

3) Find the stock price of the break-even.

Answer 1

Lets outline the strategy specified :

long stock + short call + long put = this is a collar strategy

1) Current vale of the strategy :

$160 - max(0,160-180) + max(0,150-160) + 7 -7 = 160$

this is a zero cost collar

2) The formula for calculating maximum profit is given below:

• Max Profit = Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received = 180-160+7-7= $20
• Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

The formula for calculating maximum loss is given below:

• Max Loss = Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received = 160-150-7+7 = $30
• Max Loss Occurs When Price of Underlying <= Strike Price of Long Put

for maximum profit the price of the underlying should be greater than or equal to 180 and for the maximum loss the stock price should be less than or equal to 150. thus the price range is between 150 and 180

3)The underlier price at which break-even is achieved for the collar strategy position can be calculated using the following formula.

• Breakeven Point = Purchase Price of Underlying + Net Premium Paid = 160 -7+7 = $160