Question

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An investor sells a European call option with strike price of E and maturity T and...

An investor sells a European call option with strike price of E and maturity T and buys a put with the same strike price and maturity on the same underlying asset.

a.Create a payoff table of this position at expiration

b. Show this payoff on a graph

Solutions

Expert Solution

Payoff of a short call option = -max(St - E, 0)

Payoff of a long put option = max(E - St, 0)

The payoff of this position at expiry is the sum of these two payoffs = -max(St - E, 0) + max(E - St, 0)

Screenshot with formulas

Can you please upvote? Thank You :-)

jeff jeffy answered 2 years ago
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