Question

In: Finance

What is the maximum profit / loss and break-even for the following option trades? Buy 1...

What is the maximum profit / loss and break-even for the following option trades?
1. Buy 1 XYZ 30 Call @ 2.50
2. Sell 1 XYZ 25 Call @ 4.00
3. Buy 1 XYZ 40 Put @ 5.50
4. Sell 1 XYZ 30 Put @ 2.00

Expert Solution

Sol:

Call option gives its buyer the right to buy the security at a specific price on a future date.

Put option gives its buyer the right to sell the security at a specific price on a future date.

The maximum loss incurred by a buyer of a call and put option is the initial amount paid for buying the option (Premium amount)

The maximum loss incurred by a seller of the call option is unlimited and put option will be the strike price - premium amount.

a) Buy 1 XYZ 30 Call @ 2.50

Maximum profit = Unlimited

Maximum Loss = is the premium amount paid = $2.50 per share

Break even = Will be the Strike price + Premium amount paid = 30 + 2.50 = $32.50

b) Sell 1 XYZ 25 Call @ 4.00

Maximum profit = Will be the premium amount received = $4

Maximum Loss = Loss will be unlimited

Break even = Will be the Strike price + Premium amount = 25 + 4 = $29

c) Buy 1 XYZ 40 Put @ 5.50

Maximum profit = Will be the strike price - premium amount paid = 40 - 5.5 = $34.50

Maximum Loss = is the premium amount paid = $5.50 per share

Break even = Will be the Strike price - Premium amount paid = 40 - 5.50 = $34.50

d) Sell 1 XYZ 30 Put @ 2.00

Maximum profit = Will be the premium amount received = $2

Maximum Loss = Will be the Strike price - Premium amount = 30 - 2 = $28

Break even = Will be the Strike price - Premium amount = 30 - 2 = $28

jeff jeffy answered 1 year ago

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