An investor purchases a stock for $60 and a one-year put for $0.70 with a strike...

An investor purchases a stock for $60 and a one-year put for $0.70 with a strike price of $55. He also sells a one-year call for $0.75 with a strike price of $65.

What is the total cost of acquiring this position?

What is the maximum payoff for this position?

What is the maximum profit for this position?

What is the minimum payoff for this position?

What is the minimum profit for this position?

Draw the payoff and profit graphs together with payoff table for this position.

	S<55	55<S<65	65<S
Stock share
Put@55
Call@65

Solutions

Expert Solution

Options gives a right but not an obligation to the holder to buy or sell an asset at a certain date at a certain rate

Payoffs

Call payoff = (Spot Price - Strike Price ) (Where S>X) or Zero (Where S<X)

Put Payoffs = (Strike Price - Spot Price) (Where S<X) or Zero (Where S>X)

a) Total Cost to acquire the position = 59.95

b) Maximum Payoff = 65

c) Maximum Profit = 5.05

d) Minimum Payoff = 55

e) Minimum Profit = -4.95

Graph and payoff chart is given above.

jeff jeffy answered 1 year ago

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