Question

1. INTC current stock price is 23. You sold a 22 put and bought a 21 put. The premium on the 22 put is 0.6, and the premium on the 21 put is 0.3. Analyze your gain or loss if on the expiration day the stock price is larger than 22, between 21 and 22, less than 2

Answer 1

Profit on the short put = -max(X - St, 0) + premium received

Profit on the long put = max(X - St, 0) - premium paid

Short put X = 22, premium received = 0.6

Long put X = 21, premium paid = 0.3

St > 22, Let's say St = 23

Profit on the short put = -max(22 - 23, 0) + 0.6

Profit on the short put = 0.6

Profit on the long put = max(21 - 23, 0) - 0.3

Profit on the long put = -0.3

Total profit = 0.6 - 0.3 = 0.3

This is the maximum gain

St is between 21 and 22, Let's say St = 21

Profit on the short put = -max(22 - 21, 0) + 0.6

Profit on the short put = -1 + 0.6 = -0.4

Profit on the long put = max(21 - 21, 0) - 0.3

Profit on the long put = - 0.3

Total profit = -0.4 - 0.3 = -0.7

Let's say St = 22

Profit on the short put = -max(22 - 22, 0) + 0.6

Profit on the short put = 0.6

Profit on the long put = max(21 - 22, 0) - 0.3

Profit on the long put = - 0.3

Total profit = 0.6 - 0.3 = 0.3

St < 21, Let's say St = 20

Profit on the short put = -max(22 - 20, 0) + 0.6

Profit on the short put = -2 + 0.6 = -1.4

Profit on the long put = max(21 - 20, 0) - 0.3

Profit on the long put = 1 - 0.3 = 0.7

Total profit = -1.4 + 0.7 = -0.7

0.7 is the maximum loss

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