Question

An investor purchases a stock for $56 and a put for $.80 with a strike price of $50. The investor sells a call for $.80 with a strike price of $66. What is the maximum profit and loss for this position? (Loss amount should be indicated by a minus sign.)

Maximum profit	$
Maximum loss	$

Answer 1

1) If the stock price falls below 50,

The call option will be exercised, the payoff from the put option = strike price - stock price

= $50 - stock price.

Capital gain from the stock = stock price - 56

The call option will not be exercised

Total payoff = 50 - strike stock price + stock price - 56 = -$6.

2) If the stock price rises above 66

Put option will not be exercised

Capital gain from the stock = stock price - 56

Call option will be exercised, and the pay off = 66 - stock price

Total payoff = stock price - 56 + 66 - stock price = $10

3) If the price is between 50 and 66

Neither option will be exercised

Capital gain from the stock = stock price - 56

Total payoff = stock price - 56.

Since stock price is assumed to be between 56 and 66, so total payoff ranges between (50 - 56) = -6 and (66 - 56) = 10

Considering all three scenarios, the minimum profit is -$6, and the maximum profit is $10.