Question

In: Finance

Suppose that you buy a six-month call option on stock Y with an exercise price of...

Suppose that you buy a six-month call option on stock Y with an exercise price of $80 and sell a six-month call option on Y with an exercise price of $120. Draw a position diagram showing the payoffs when the options expire. (Hint: Determine and then add up the values of the two options given different share prices.)

Solutions

Expert Solution

Payoff from call option if stock price is more than the strike price = Stock price – Strike price

Payoff from call option if stock price is less than the strike price = 0

Therefore, Payoff table:

Stock Price (assumed price at the time of expire)

Payoff (from buying a call option of strike price $80)

Payoff (from selling a call option of strike price $120)

Profit (payoff 1 + Payoff 2)

$50

$0

$0

$0 + $0 = $0

$60

$0

$0

$0 + $0 = $0

$70

$0

$0

$0 + $0 = $0

$80

$0

$0

$0 + $0 = $0

$90

+$10

$0

$10 + $0 = $10

$100

+$20

$0

$20 + $0 = $20

$110

+$30

$0

$30 + $0 = $30

$120

+$40

$0

$40 + $0 = $40

$130

+$50

-$10

$50 - $10 = $40

$140

+$60

-$20

$60 - $20 = $40

Position diagram

Therefore Minimum profit is $0 and maximum profit is $40.

jeff jeffy answered 5 months ago
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