Megan inherited 10,000 shares of Groupon company’s stock two years back. Groupon stock is currently selling...

Megan inherited 10,000 shares of Groupon company’s stock two years back. Groupon stock is currently selling for $160. Groupon is facing a lot of uncertainty due to the issue of data privacy. Megan is worried about the price risk involved in keeping her stocks. She considers the following strategy. She will write 10,000 June call options on Groupon with strike price of $180 and a call price of $10 each. She will buy 10,000 June put options on Groupon with strike price of $140 and a put price of $10 each.

What is the maximum and minimum profit?

Expert Solution

Statement showing maximum and minimum profit

Price as at expiry	Profit/loss on holding stock	Loss on call option shorted Strike price = $ 180	Profit on Put option bought Strike price = $ 140	Premium paid/received	Net profit Per shares	Total profit Profit per share x 10000
100	-60	0	40	0	-20	-200000
110	-50	0	30	0	-20	-200000
120	-40	0	20	0	-20	-200000
130	-30	0	10	0	-20	-200000
140	-20	0	0	0	-20	-200000
150	-10	0	0	0	-10	-100000
160	0	0	0	0	0	0
170	10	0	0	0	10	100000
180	20	0	0	0	20	200000
190	30	-10	0	0	20	200000
200	40	-20	0	0	20	200000
210	50	-30	0	0	20	200000
220	60	-40	0	0	20	200000
230	70	-50	0	0	20	200000
240	80	-60	0	0	20	200000
250	90	-70	0	0	20	200000

Here premium is received for writting call option and premium is paid for buying put option, and hence net premium paid/received = 10 - 10 = 0$

Thus Minimum profit from this strategy = $100000

Maximum profit from this strategy = $200000

jeff jeffy answered 1 year ago

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