Question

The market value for the JPM stock is $120 dollars. A6-month call option contract on JPM stock with a strike price of $140is traded at $4. In addition, a 6-month put option contract on JPM stock with strike price of $100 is traded at $4.Suppose you take a long position in the call and a long position in the put.

What is the cost of this strategy?

Draw the payoff diagram (or P/L diagram) of this strategy.

Answer 1

• Cost to fthis strategy is the premium paid for both the options that is 4+4 = $8
• Long call pays off when the Spot price > strike price of 140
• Long put pays off when the Spot price < strike price of 100
• Profit = payoff - cost
• Total profit = profit on call + profit on put

Below is the data table for the payoff diagram:

Long Call	Long Put
Spot price	Exercise price	Premium	Spot price	Exercise price	Premium
	140	4		100	4
	Payoff	Profit		Payoff	Profit	Total Profit
70	0	-4	70	30	26	22
75	0	-4	75	25	21	17
80	0	-4	80	20	16	12
85	0	-4	85	15	11	7
90	0	-4	90	10	6	2
95	0	-4	95	5	1	-3
100	0	-4	100	0	-4	-8
105	0	-4	105	0	-4	-8
110	0	-4	110	0	-4	-8
115	0	-4	115	0	-4	-8
120	0	-4	120	0	-4	-8
125	0	-4	125	0	-4	-8
130	0	-4	130	0	-4	-8
135	0	-4	135	0	-4	-8
140	0	-4	140	0	-4	-8
145	5	1	145	0	-4	-3
150	10	6	150	0	-4	2
155	15	11	155	0	-4	7
160	20	16	160	0	-4	12
165	25	21	165	0	-4	17
170	30	26	170	0	-4	22
175	35	31	175	0	-4	27

Total payoff = call payoff + put payoff: