Question

Suppose that you buy 4 put options with strike price $50 at $5 each, and sell 5 call options with strike price $31 at $2.5 each.
a) What is your profit if the stock price at maturity is $41?
b)What is your profit if the stock price at maturity is $52?
c) What is your profit if the stock price at maturity is $30?

Answer 1

Working :

Premium received on call option (5*2.5)	12.5
premium paid on put option (4*5)	(20)
net premium	(7.5)

call option is an option to buy if price goes favorable that is the exercise price is less than spot price at expiry .Put option is an option to sell if exercise price is higher than spot price at expiry .

	Call option [A] (sell so you are writer of option )	Put option[B] (buy)	Total payoff [C=A+B]	Net premium[D]	Profit[C+D]
price = 41	The option will be exercised by buyer since exercise price is lower than spot price net loss : 5* (31-41)= 5*-10 = -50	The option will be exercised and profit = 4*(50-41)=36	-50+36=-14	-7.5	-14-7.5= - 21.5 loss
If price = 52	Net loss : 5* (31-52) = 5* -21 -105	option will not be exercised since exercise price of $ 50 is lower than spot price of 52	-105+0=-105	-7.5	-105-7.5=- 112.5 loss
If price = 30	option will not be exercised since the buyer of option will not buy the stock at $ 31 which cost $ 30 in market	option will be exercised ,profit = 4*(50-30) = 80	0+80=80	-7.5	80-7.5= 72.5 profit