Question

In: Finance

Roy constructs an options portfolio based on the MXC stock. He writes a call option with...

Roy constructs an options portfolio based on the MXC stock. He writes a call option with exercise price $74 and writes a put option with exercise price $70. Both options have the same expiration date.

  

MXC Call Option price $0.42

Exercise price $74

MXC Put $0.58 $70

       

  1. Draw the payoff diagram of this portfolio at option expiration as a function of MXC stock price at that time.

  2. What will be the profit/loss on this position if MXC is selling at $72 on the option expiration date? What if MXC is selling at $77?

  3. At what two stock prices will Roy break even on his position?

Solutions

Expert Solution

Call option gives it's buyer right to buy the underlying at specified price in future. Thus when market price as at expiry is more than strike price, call option will get exercised

Here we have written call option hence we will receive premium of $0.42

Put option gives it's buyer right to Sell the underlying at specified price in future. Thus when market price as at expiry is less than strike price, put option will get exercised

Here we have written put option hence we will receive premium of $0.58

Statement showing Payoff and net profit/loss on position

Price as at expiry Loss on call option shorted
Strki price = 74$
Loss on Put option shorted
Strki price = 70$
Payoff Premium received
(0.42+0.58)
Net profit/loss
63 -7 -7 1 -6
64 -6 -6 1 -5
65 -5 -5 1 -4
66 -4 -4 1 -3
67 -3 -3 1 -2
68 -2 -2 1 -1
69 -1 -1 1 0
70 0 1 1
71 0 1 1
72 0 1 1
73 0 1 1
74 0 1 1
75 -1 -1 1 0
76 -2 -2 1 -1
77 -3 -3 1 -2
78 -4 -4 1 -3
79 -5 -5 1 -4
80 -6 -6 1 -5
81 -7 -7 1 -6

Thus if stock price as at expity is 72$ , total profit loss from the strategy = 1$

if stock price as at expity is 77$ , total profit loss from the strategy = -2$

At 75$ and 69$ this strategy will break even

Diagram


Related Solutions

Roy constructs an options portfolio based on the MXC stock. He writes a call option with...
Roy constructs an options portfolio based on the MXC stock. He writes a call option with exercise price $74 and writes a put option with exercise price $70. Both options have the same expiration date.    MXC Call MXC Put Option price $0.42    $0.58 Exercise price $74     $70 a. Draw the payoff diagram of this portfolio at option expiration as a function of MXC stock price at that time. b. What will be the profit/loss on this position if...
Roy constructs an options portfolio based on the MXC stock. He writes a call option with...
Roy constructs an options portfolio based on the MXC stock. He writes a call option with exercise price $74 and writes a put option with exercise price $70. Both options have the same expiration date. MXC Call MXC Put Option price $0.42 $0.58 Exercise price $74 $70 a. Draw the payoff diagram of this portfolio at option expiration as a function of MXC stock price at that time. b. What will be the profit/loss on this position if MXC is...
Roy constructs an options portfolio based on the MXC stock. He writes a call option with...
Roy constructs an options portfolio based on the MXC stock. He writes a call option with exercise price $74 and writes a put option with exercise price $70. Both options have the same expiration date MXC Call MXC Put Option price $0.42 $0.58 Exercise price $74 $70 a. Draw the payoff diagram of this portfolio at option expiration as a function of MXC stock price at that time. b. What will be the profit/loss on this position if MXC is...
1. Consider the following options portfolio: You write a November 2017 expiration call option on stock...
1. Consider the following options portfolio: You write a November 2017 expiration call option on stock Y with exercise price of $80. You also write a November 2017 put option on stock Y with exercise price of $75. Use the chart below to answer the following: Graph the payoff of this portfolio at expiration as a function of the stock price at that time What will be the profit/loss on this position if stock Y is selling at $77 on...
Which portfolio of options will replicate a plain vanilla call option? a. An up-and-in barrier option...
Which portfolio of options will replicate a plain vanilla call option? a. An up-and-in barrier option call and a up-and-out barrier put option each with the same strike as the plain vanilla option. b. Barrier options can't be used to replicate a plain vanilla option. c. An up-and-in barrier option call and a up-and-out barrier call option each with the same strike as the plain vanilla option.
An investor has an option portfolio composed of 5,000 identical short call options. The call option’s...
An investor has an option portfolio composed of 5,000 identical short call options. The call option’s delta is 0.4. What does it mean intuitively that the delta is 0.4? How can the portfolio be made delta-neutral? How will the delta-neutral portfolio’s value change if there is a small (e.g. 0.1%) upward movement in the stock price? Will the delta-neutral portfolio’s value change if there is a large (e.g. 10%) upward movement in the stock price? If no, why not. If...
Consider a portfolio that consists of buying a call option on a stock and selling a...
Consider a portfolio that consists of buying a call option on a stock and selling a put option. The stock pays continuous dividends at the yield rate of 5%. The options have a strike of $62 and expire in six months. The current stock price is $60 and the continuously compounded risk-free interest rate is 15%. Find the elasticity of this portfolio.
Consider the following options portfolio. You write a January expiration call option on IBM with exercise...
Consider the following options portfolio. You write a January expiration call option on IBM with exercise price 130 and premium of $2.18. You write a January IBM put option with exercise price 125 and premium of $2.44. Graph the payoff of this portfolio at option expiration as a function of IBM’s stock price at that time. What will be the profit/loss on this position if IBM is selling at 128 on the option expiration date? What if IBM is selling...
Consider the following options portfolio: You write a November 2014 expiration call option on Facebook with...
Consider the following options portfolio: You write a November 2014 expiration call option on Facebook with exercise price $80. The price of this call is $2.64. You also write a November expiration Facebook put option with exercise price $75. The price of this put is $ 3.97. a. Graph the payoff of this portfolio at option expiration as a function of the stock price at that time. b. What will be the profit/loss on this position if Facebook is selling...
Consider the following options   portfolio:   You   write   a   June   2017 expiration   call   option   on   Microsoft   with  ...
Consider the following options   portfolio:   You   write   a   June   2017 expiration   call   option   on   Microsoft   with   exercise   price   $72.   You   also write   a   June   expiration   Microsoft   put   option   with   exercise   price $70. (LO   15-2) a.   Graph   the   payoff   of   this   portfolio   at   option   expiration   as   a   function of   the   stock   price   at   that   time.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT