1. Draw the PnL graph (profit vs losses) for an option strategy that involves bu
ID: 2714338 • Letter: 1
Question
1. Draw the PnL graph (profit vs losses) for an option strategy that involves buying a call and two puts (both options on the money). The price of the stock is $25 and the cost of a call is $1 and the cost of a put is $1.5. Make sure you show the break-even points.
2. Draw the PnL graph (profit vs losses) for an option strategy that involves selling a put with strike price $55 ($1), buying two puts on the money ($2) and selling a put with strike price $65 ($6). The current price of the stock is $60 and the prices in the parentheses are the cost per option. Make sure you show the break-even points.
Explanation / Answer
Answer-1 Here the strike price of stock is = $25 Price of one call = $1 Price of one put = $1.50 If the stock price is: Cost of stock Profit or loss on one Call Profit or loss on two Puts Combined loss or gain $20.0 $25 ($1) $2.00 $1.00 $21.0 $25 ($1) $1.00 $0.00 $22.0 $25 ($1) $0.00 ($1.00) $23.0 $25 ($1) ($1.00) ($2.00) $24.0 $25 ($1) ($2.00) ($3.00) $25.0 $25 ($1) ($3.00) ($4.00) $26.0 $25 $0 ($4.00) ($4.00) $27.0 $25 $1 ($5.00) ($4.00) $28.0 $25 $2 ($6.00) ($4.00) $29.0 $25 $3 ($7.00) ($4.00) $30.0 $25 $4 ($8.00) ($4.00) Here the break even stock price = $21 as at this price the combined profi is = 0
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