In excel, use payoffs to show the trading position created when a call option is bought...

In excel, use payoffs to show the trading position created when a call option is bought with strike price X2 = $60 and a put option is sold with strike price X1 = $40. What's the new position when X1 = X2 = $50?

Expert Solution

a) Buy call option with X2 = $60

Sell put option with X1 = $40

The payoff of bought call option = max(St - X2, 0) = max(St - 60, 0)

The payoff of sold put option = -max(X1 - St, 0) = -max(40 - St, 0)

The payoff of the position = The payoff of bought call option + The payoff of sold put option

The payoff of the position = max(St - 60, 0) - max(40 - St, 0)

Screenshot with formulas

b) When X1 = X2

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jeff jeffy answered 1 year ago

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