Question

Q1. The price of a stock is $40. The price of a 1-year European put option on the stock with a strike of $30 is quoted as $7 and the price of a 1-year European call option on the stock with a strike of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a diagram illustrating how the investor’s P&L varies with the stock price over the next year.

Q2. Stock in CP Inc. is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $1.95. Compare the percentage gains and losses from a $97,500 investment in stock versus the option in 90 days for stock prices of $40, $50, and $60.

Answer 1

Q1:

The diagram for Q1 looks as follows:

To arrive to the above data please refer the simulation as given in the below table:

No. of Shares	No.of Puts	No. of Calls	Put Option Rate	Stock price	Market price	Put Strike price	Exercise Sell Option	Put Investment	Put Execution	Put Net Profit	Call Option Rate	Call Strike Price	Exercise Call Option	Call income	Call Execution	Call Net Profit	Share Buy Value	Share profit	Net profit
100	100	100	7	10	1000	30	1	700	3000	1300	5	50	0	500	0	500	4000	-3000	-1200
100	100	100	7	11	1100	30	1	700	3000	1200	5	50	0	500	0	500	4000	-2900	-1200
100	100	100	7	12	1200	30	1	700	3000	1100	5	50	0	500	0	500	4000	-2800	-1200
100	100	100	7	13	1300	30	1	700	3000	1000	5	50	0	500	0	500	4000	-2700	-1200
100	100	100	7	14	1400	30	1	700	3000	900	5	50	0	500	0	500	4000	-2600	-1200
100	100	100	7	15	1500	30	1	700	3000	800	5	50	0	500	0	500	4000	-2500	-1200
100	100	100	7	16	1600	30	1	700	3000	700	5	50	0	500	0	500	4000	-2400	-1200
100	100	100	7	17	1700	30	1	700	3000	600	5	50	0	500	0	500	4000	-2300	-1200
100	100	100	7	18	1800	30	1	700	3000	500	5	50	0	500	0	500	4000	-2200	-1200
100	100	100	7	19	1900	30	1	700	3000	400	5	50	0	500	0	500	4000	-2100	-1200
100	100	100	7	20	2000	30	1	700	3000	300	5	50	0	500	0	500	4000	-2000	-1200
100	100	100	7	21	2100	30	1	700	3000	200	5	50	0	500	0	500	4000	-1900	-1200
100	100	100	7	22	2200	30	1	700	3000	100	5	50	0	500	0	500	4000	-1800	-1200
100	100	100	7	23	2300	30	1	700	3000	0	5	50	0	500	0	500	4000	-1700	-1200
100	100	100	7	24	2400	30	1	700	3000	-100	5	50	0	500	0	500	4000	-1600	-1200
100	100	100	7	25	2500	30	1	700	3000	-200	5	50	0	500	0	500	4000	-1500	-1200
100	100	100	7	26	2600	30	1	700	3000	-300	5	50	0	500	0	500	4000	-1400	-1200
100	100	100	7	27	2700	30	1	700	3000	-400	5	50	0	500	0	500	4000	-1300	-1200
100	100	100	7	28	2800	30	1	700	3000	-500	5	50	0	500	0	500	4000	-1200	-1200
100	100	100	7	29	2900	30	1	700	3000	-600	5	50	0	500	0	500	4000	-1100	-1200
100	100	100	7	30	3000	30	1	700	3000	-700	5	50	0	500	0	500	4000	-1000	-1200
100	100	100	7	31	3100	30	0	700	0	-700	5	50	0	500	0	500	4000	-900	-1100
100	100	100	7	32	3200	30	0	700	0	-700	5	50	0	500	0	500	4000	-800	-1000
100	100	100	7	33	3300	30	0	700	0	-700	5	50	0	500	0	500	4000	-700	-900
100	100	100	7	34	3400	30	0	700	0	-700	5	50	0	500	0	500	4000	-600	-800
100	100	100	7	35	3500	30	0	700	0	-700	5	50	0	500	0	500	4000	-500	-700
100	100	100	7	36	3600	30	0	700	0	-700	5	50	0	500	0	500	4000	-400	-600
100	100	100	7	37	3700	30	0	700	0	-700	5	50	0	500	0	500	4000	-300	-500
100	100	100	7	38	3800	30	0	700	0	-700	5	50	0	500	0	500	4000	-200	-400
100	100	100	7	39	3900	30	0	700	0	-700	5	50	0	500	0	500	4000	-100	-300
100	100	100	7	40	4000	30	0	700	0	-700	5	50	0	500	0	500	4000	0	-200
100	100	100	7	41	4100	30	0	700	0	-700	5	50	0	500	0	500	4000	100	-100
100	100	100	7	42	4200	30	0	700	0	-700	5	50	0	500	0	500	4000	200	0
100	100	100	7	43	4300	30	0	700	0	-700	5	50	0	500	0	500	4000	300	100
100	100	100	7	44	4400	30	0	700	0	-700	5	50	0	500	0	500	4000	400	200
100	100	100	7	45	4500	30	0	700	0	-700	5	50	0	500	0	500	4000	500	300
100	100	100	7	46	4600	30	0	700	0	-700	5	50	0	500	0	500	4000	600	400
100	100	100	7	47	4700	30	0	700	0	-700	5	50	0	500	0	500	4000	700	500
100	100	100	7	48	4800	30	0	700	0	-700	5	50	0	500	0	500	4000	800	600
100	100	100	7	49	4900	30	0	700	0	-700	5	50	0	500	0	500	4000	900	700
100	100	100	7	50	5000	30	0	700	0	-700	5	50	1	500	5000	500	4000	1000	800
100	100	100	7	51	5100	30	0	700	0	-700	5	50	1	500	5000	400	4000	1100	800
100	100	100	7	52	5200	30	0	700	0	-700	5	50	1	500	5000	300	4000	1200	800
100	100	100	7	53	5300	30	0	700	0	-700	5	50	1	500	5000	200	4000	1300	800
100	100	100	7	54	5400	30	0	700	0	-700	5	50	1	500	5000	100	4000	1400	800
100	100	100	7	55	5500	30	0	700	0	-700	5	50	1	500	5000	0	4000	1500	800
100	100	100	7	56	5600	30	0	700	0	-700	5	50	1	500	5000	-100	4000	1600	800
100	100	100	7	57	5700	30	0	700	0	-700	5	50	1	500	5000	-200	4000	1700	800
100	100	100	7	58	5800	30	0	700	0	-700	5	50	1	500	5000	-300	4000	1800	800
100	100	100	7	59	5900	30	0	700	0	-700	5	50	1	500	5000	-400	4000	1900	800
100	100	100	7	60	6000	30	0	700	0	-700	5	50	1	500	5000	-500	4000	2000	800
100	100	100	7	61	6100	30	0	700	0	-700	5	50	1	500	5000	-600	4000	2100	800
100	100	100	7	62	6200	30	0	700	0	-700	5	50	1	500	5000	-700	4000	2200	800
100	100	100	7	63	6300	30	0	700	0	-700	5	50	1	500	5000	-800	4000	2300	800
100	100	100	7	64	6400	30	0	700	0	-700	5	50	1	500	5000	-900	4000	2400	800
100	100	100	7	65	6500	30	0	700	0	-700	5	50	1	500	5000	-1000	4000	2500	800

Q2:

Please rfer below table for the mentioned scenario:

Investment Amount	Stock Price	No. Of Shares	Call price	No. Of Call Options bought	Market price	Call strike Price	Call Execution	PnL for Call Options	Percentage loss/gain from option	PnL from Long Share	Percentage loss/gain from stock investment
97500	40	1950	1.95	50000	78000	50	0	-97500	-100%	-19500	-20%
97500	50	1950	1.95	50000	97500	50	0	-97500	-100%	0	0%
97500	60	1950	1.95	50000	117000	50	1	402500	413%	19500	20%