An investor buys 100 shares of a stock, shorts 60 call options on the stock with...

An investor buys 100 shares of a stock, shorts 60 call options on the stock with strike price of $20 and buys 60 put options on the stock with strike price of $10. All options are one-year European options. Draw a diagram illustrating the value of the investor’s portfolio as a function of the stock price after one year.

Expert Solution

the value of the investor’s portfolio as a function of the stock price, S after one year = 100 x S - 60 x max (S - K1, 0) + 60 x max (K2 - S, 0) = 100S - 60 x max (S - 20, 0) + 60 x max (10 - S, 0)

Stock Price, S	Value
-	600
5	800
10	1,000
15	1,500
20	2,000
25	2,200
30	2,400
35	2,600
40	2,800
45	3,000
50	3,200

And the diagram will be:

jeff jeffy answered 1 year ago

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