Problem 20:5 An investor purchases a stock for $38 and a put for $0.50 with a st

Question

Problem 20:5

An investor purchases a stock for $38 and a put for $0.50 with a strike price of $35. The investor sells a call for $0.50 with a strike price of $40. What is the maximum profit and loss for this position?

What is the Max profit?

Note: It is not 2.00, -2.00, 3.00,-3.00, or 42.00. These are all incorrect answers that I have been provided. Please do not response if you believe any of these are the correct answer.

An investor purchases a stock for $38 and a put for $0.50 with a strike price of $35. The investor sells a call for $0.50 with a strike price of $40. What is the maximum profit and loss for this position?

What is the Max profit?

Note: It is not 2.00, -2.00, 3.00,-3.00, or 42.00. These are all incorrect answers that I have been provided. Please do not response if you believe any of these are the correct answer.

Explanation / Answer

If price of the stock goes below $35, he can exercise put option @ $35

Hence his maximum loss is $35 - $38 = -$3

If price of the stock goes above $40, call option sold by him will be exercised by the other person who has bought the call option from the investor @ $40

Hence investor maximum profit is $40 - $38 = $2

Stock Purchase cost 38 Cost of Put Option 0.50 Sale value of Call Option -0.50 Total Cost 38

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