Question

33.). Compute the maximum gain, maximum loss, and breakeven of the individual options strategies below. In each of the examples shown, determine the maximum profit, maximum loss, and breakeven point. (PLEASE SHOW ALL WORK) (1). An investor buys an RGI DEC 60 call for $4.00 (2). Sell 1 BAC SEPT 70 call at 6.00USD Sell 1 BAC SEPT 70 put at 1.00USD (3). Long 1 XYZ JUL 50 call @ 5.50USD Write 1 XYZ JUL 55 call @ 3.50USD

Answer 1

1. Buys RGI Dec Call @ $4.

Ans:

Maximum Loss:- Since , Investor is Buyer of Call, Maximum Loss in this case is $4 only i.e. Premium paid for buying the option.

Break Even Point- Break even point in this case will be when price of RGI underlying will close at 64 which can be seen below:

Strike Price	RGI Closing Price	Profit/Loss on exercise of Option	Premium Paid	Net Profit/Loss
60	56	0	-4	-4
60	60	0	-4	-4
60	64	4	-4	0
60	68	8	-4	4
60	70	10	-4	6

Maximum Profit:

As can be seen above, there is no limit on profit in case it closes above 64 which can be earned form this position.

2. Sell 1 BAC Sep 70 Call @$6 and Sell 1 BAC sep 70 Put @ $1.

Ans:

Strike Price	RGI Closing Price	Profit/Loss on exercise of Call Option (A)	Profit/Loss on exercise of Put Option (B)	Net Profit/Loss C=(A+B)	Premium earned from Sale of Call (D)	Premium earned from Sale of Put (E)	Net Income from Sale of options F=(D+E)	Net profit/Loss at the Close G=(C+F)
70	50	0	-20	-20	6	1	7	-13
70	60	0	-10	-10	6	1	7	-3
70	63	0	-7	-7	6	1	7	0
70	70	0	0	0	6	1	7	7
70	77	-7	0	-7	6	1	7	0
70	80	-10	0	-10	6	1	7	-3
70	90	-20	0	-20	6	1	7	-13

Maximum Loss:- Since , Investor is Seller of Call & Put, the loss can be unlimited in this case.

Break Even Point- Break even point in this case will be when price of BAC underlying will close at 63 or 77 as highlighted above in green colour above.

Maximum Profit:

As can be seen above, there is maximum profit of $7 in case the underlying close at $70 only.

3. Long 1 XYZ Jul 50 Call @$5.5 and Sell 1 XYZ Jul 55 Call@ $3.50.

Ans:

XYZ Closing Price	Profit/Loss on exercise of 50 Call Option (A)	Profit/Loss on exercise of 55 Call Option (B)	Net Profit/Loss= C=(A+B)	Premium Paid on 50 Call (D)	Premium earned from Sale of 55 Call (E)	Net Income from Sale of options F=(D+E)	Net profit/Loss at the Close G=(C+F)
40	0	0	0	-5.5	3.50	-2	-2
45	0	0	0	-5.5	3.50	-2	-2
50	0	0	0	-5.5	3.50	-2	-2
52	2	0	2	-5.5	3.50	-2	0
55	5	0	5	-5.5	3.50	-2	3
60	10	-5	5	-5.5	3.50	-2	3
65	15	-10	5	-5.5	3.50	-2	3

Maximum Loss:- Since , Investor is Buyer of Call and Seller of Call , there is limited loss of USD2 only and can be seen in table below.

Break Even Point- Break even point in this case will be when price of XYZ underlying will close at 52 as highlighted above in green colour above.

Maximum Profit:

As can be seen above, there is maximum profit of $3 in case the underlying close above $55 only.