Question

Consider the following option strategy: • Long one call with $100 strike price, bought for $11 • Long one call with $90 strike price, bought for $20 • Short one call with $105 strike price, sold for $8 • Short one call with $95 strike price, sold for $16 1. Draw a picture of the payoff of the option strategy at expiration as a function of the stock price. 2. Draw a picture of the investor’s profit as a function of the stock price

Answer 1

Here Premium paid = $11 + $20 = $31

Premium received = $8 + $ 16.1 = $24.1

Thus Net premium paid = 31 -24.1

=$6.9

1) Table showing payoff

Price as at expiry	Profit on Long call with $100 strike price	Profit on Long call with $90 strike price	Loss on Shorted call with $105 strike price	Loss on Shorted call with $95 strike price	Payoff
85					0
86					0
87					0
88					0
89					0
90		0			0
91		1			1
92		2			2
93		3			3
94		4			4
95		5		0	5
96		6		-1	5
97		7		-2	5
98		8		-3	5
99		9		-4	5
100	0	10		-5	5
101	1	11		-6	6
102	2	12		-7	7
103	3	13		-8	8
104	4	14		-9	9
105	5	15	0	-10	10
106	6	16	-1	-11	10
107	7	17	-2	-12	10
108	8	18	-3	-13	10
109	9	19	-4	-14	10
110	10	20	-5	-15	10

Diagram

2) Table showing Profit/loss

Price as at expiry	Payoff	Premium	Profit/loss
85	0	-6.9	-6.90
86	0	-6.9	-6.90
87	0	-6.9	-6.90
88	0	-6.9	-6.90
89	0	-6.9	-6.90
90	0	-6.9	-6.90
91	1	-6.9	-5.90
92	2	-6.9	-4.90
93	3	-6.9	-3.90
94	4	-6.9	-2.90
95	5	-6.9	-1.90
96	5	-6.9	-1.90
97	5	-6.9	-1.90
98	5	-6.9	-1.90
99	5	-6.9	-1.90
100	5	-6.9	-1.90
101	6	-6.9	-0.90
102	7	-6.9	0.10
103	8	-6.9	1.10
104	9	-6.9	2.10
105	10	-6.9	3.10
106	10	-6.9	3.10
107	10	-6.9	3.10
108	10	-6.9	3.10
109	10	-6.9	3.10
110	10	-6.9	3.10

Diagram