Question

Suppose you construct the following European option trades on Apple stock: write a put option with exercise price $31 and premium $1.43, and write a call option with exercise price $31 and premium $3.97. What is your maximum dollar net profit, per share?

Answer 1

In this case, we have written (or sold) two options. One Put & other call.

In case of Put option sold for a premium of $1.43, it will be exercised if the price goes below $31

In case of Call option sold for a premium of $3.97, it will be exercised it the price goes above $31

It means that if the price goes above or below $31, one of the options will be exercised. The maximum profits are $5.4 which is the sum of premiums($1.43 and $3.97). Take a look at the table:

Let'd discuss the above table:

1. When the price is $31 (yellow portion), we have a maximum profit of $5.4. This is the answer to the question asked.

2. When the price falls below $31(blue portion), only the put option shall be exercised and our payoff will keep on falling indefinitely (As we can see when the price is going from $30 to $23, our net payoff has fallen from -$1 to -$8) and our net profits will also fall as in Column F.

3. When the price rises above $31(Orange portion), only the call option shall be exercised and our payoff will keep on falling indefinitely and our net profits will also fall as in column F.