Question

A call option on Company B common stock is worth $3 with 7 months before expiration. The strike price on the call is $40 and the price per share is currently trading at $38 per share. The put option at the same exercise price is worth $5.

e. If you bought both the put and call in (a) above and held them both to expiration, calculate your loss or profit on both the put and call if the price at expiration was $47 per share. X=40 Paid 3 for Call Paid 5 for Put

f. Graph (contingency graph) the payoffs for a long straddle at expiration [stock price X axis, option payoff on the Y axis] at different stock prices at the expiration of a straddle. X=40 Call =3 Put = 5

Answer 1

e.

Profit/ loss = Intrinsic value of call option + intrinsic value of put option - cost of call - cost of put

=(47-40) + 0 -3-5 =-1 ( loss of 1$)

f.

Payoff line is without considering cost of options and profit line is with considering option costs.

Graph prepared from below data:

Share price	intrinsic value call strike 40	intrinsic value Put stike 40	Long call price	Long Put price	Total Payoff	Total Profit
0	0	40	-3	-5	40	32
2	0	38	-3	-5	38	30
4	0	36	-3	-5	36	28
6	0	34	-3	-5	34	26
8	0	32	-3	-5	32	24
10	0	30	-3	-5	30	22
12	0	28	-3	-5	28	20
14	0	26	-3	-5	26	18
16	0	24	-3	-5	24	16
18	0	22	-3	-5	22	14
20	0	20	-3	-5	20	12
22	0	18	-3	-5	18	10
24	0	16	-3	-5	16	8
26	0	14	-3	-5	14	6
28	0	12	-3	-5	12	4
30	0	10	-3	-5	10	2
32	0	8	-3	-5	8	0
34	0	6	-3	-5	6	-2
36	0	4	-3	-5	4	-4
38	0	2	-3	-5	2	-6
40	0	0	-3	-5	0	-8
42	2	0	-3	-5	2	-6
44	4	0	-3	-5	4	-4
46	6	0	-3	-5	6	-2
48	8	0	-3	-5	8	0
50	10	0	-3	-5	10	2
52	12	0	-3	-5	12	4
54	14	0	-3	-5	14	6
56	16	0	-3	-5	16	8
58	18	0	-3	-5	18	10
60	20	0	-3	-5	20	12
62	22	0	-3	-5	22	14