Question

Consider the purchase of a put option with an exercise price of between $40 and $49 that costs $5 and the purchase of a call option with the same expiration date and on the same stock with an exercise price of between $51 and $60 that costs $6. Choose any strikes in the ranges. On ONE Graph plot profit for the component positions and the combination for ending stock prices from at $0 to $100, in increments of not more than $5. Be sure to label your axes and all key points and include a legend. Include both your table and the graph in your report.

Answer 1

Let us say the put option exercise price is $40

Let us say the call option exercise price is $60

Profit of a long call option = Max[S-X, 0] - P

Profit of a long put option = Max[X-S, 0] - P

S = stock price at expiry

X = exercise price

P = premium paid

The profits at various ending stock prices are calculated below :

The graph is below :