Question

​​​​​​

1. What is the maximum profit / loss and break-even for the following option spread trades?
   1. Long 100 XYZ @ 42.50 / Sell 1 XYZ 45.00 Call @ 2.00
   2. Long 100 XYZ @ 52.50 / Sell 1 XYZ 55.00 Put @ 4.00
   3. Buy 1 XYZ 40.00 Call @ 2.50 / Buy 1 XYZ 40.00 Put @ 1.75
   4. Buy 1 XYZ 50.00 Call @ 5.00 / Sell 1 XYZ 60.00 Call @ 1.50

Answer 1

Answer A)

The first strategy is also known as covered call where we take a long position in security and sell call.

Maximum Loss per share is equal to = Stock Purchase Price - Premium received on call option

= 42. 50 - 2 = 40.50

(Stock goes down to 0 but you receive call premium)

Maximum Profit per share is equal to = (Strike Price on call - Stock Purchase price) + premium received on call option

= (45- 42.5) + 2 = 4.5

Break Even Point = Stock Purchase Price - Premium Received on call option = 40.50

(If stock price at expiration is 40.5, we will have no profit or loss)

Answer B)

Maximum Profit per share = unlimited

(share price can go to any limit)

Maximum loss per share = Stock price + Strike Price of put - Premium received on short position

= 52.5 + 55 - 4 = 103.5

Break Even Point = 51.75

(Stock price at 51.75 will lead to a loss of (.75). It will also lead to loss of (3.25) as put will be exercised at 55. Option premium received of 4 will completely offset losses of .75 and 3.25)

Answer C)

Buy call and put at same strike price is known as straddle strategy.

Maximum Loss = Call premium paid + Put premium paid

=2.50 + 1.75 = 4.25

Maximum profit = Unlimited

Straddle has 2 break even points

BEP 1= Strike Price of call + Total Premium Paid

= 40 + 4.25 = 44.25

BEP 2 = Strike Price of Put - Total Premium Paid

= 40 - 4.25 = 35.75

Answer D)

This strategy can be referred to as Bull call where we buy call with lower strike price and sell call with higher strike price.

Net Premium paid = Premium received on short position - Premium paid on long position

Net Premium paid = 1.5 - 5 = (3.5)

Maximum profit = Strike Price of Short call - Strike Price of Long call - Net Premium paid

Maximum profit = 60 - 50 - 3.5 = 6.5

Maximum loss = Net Premium Paid = 3.5

BEP = Strike price of long call + Net premium paid

BEP = 50 + 3.5 = 53.5