Question

1(a). Your friend has entered a zero-cost portfolio in 3 month Microsoft options as follows: she bought 100 put options at K=32 for $8 each, she wrote 200 put options at K=28 for $6 each and she bought 100 put options at K=24 for $4 each. Create a table showing the total value of her portfolio at time T if the price of Microsoft stock is 20,22,24,26,28,30,32,34,36. (please show the detail for the caculate)

b) For the option portfolio in part (a), draw each option and the combined position on a graph with $ on the vertical axis and the stock price at time T on the horizontal axis).

Answer 1

(a) Cost of 100 put options at K(32) = 100*$8 = $800

Premium received from writing 200 put options at K(28) = 200*$6 = $1200 ( Premium is received)

Cost of 100 put options at K(24) = 100*$4 = $400

Total cost = 0

Stock price	Payoff 100 long put strike $32	Payoff 200 short put strike $28	Payoff 100 long put strike $24	Combined position
20	400	-400	0	0
22	200	0	-200	0
24	0	400	-400	0
26	-200	800	-400	200
28	-400	1200	-400	400
30	-600	1200	-400	200
32	-800	1200	-400	0
34	-800	1200	-400	0
36	-800	1200	-400	0

b)