Question

Consider an investor with a position consisting of 1 long European call and 1 long European put, both having strike price of $50. The current underlying asset price is $50. The call price is $3 and the put price is $2. With this position, if the stock price at maturity is above ___AND below___, the investor CANNOT make a profit.

Answer 1

Information provided -

Both options Strike price (K) = $50

Call Premium = $3

Put Premium = $2

Thus,

Total Cost of this Position = $3+$2 = $5

Option is a derivative which gives its holder a right to buy or sell underlying assets but not the obligation on expiration date at specific price.

There are two types of option -

• Call option - provide option holder a right to buy underlying assets on expiration date at specific price.
• Put option - provide option holder a right to sell underlying assets on expiration date at specific price.

Thus, If Stock price at maturity is greater than exercise price than Call option exercised otherwise Put option.

In above case,

To make profit, the difference between Stock price at maturity and Exercise price must be greater than $5 (i.e Cost of position)

Thus,

If on maturity, $45 < Stock price on maturity < $55 , then investor doesn't make profit with this position.

If the stock price at maturity is above $45 And below $55 the investor CANNOT make a Profit.

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.