This is an option chain for options that expires in 110 days. You can assume T =
ID: 2817463 • Letter: T
Question
This is an option chain for options that expires in 110 days. You can assume T = 0.3 year. Tthere is no bid-ask spread, thus, each option can be bought and sold at the same price.
calls
strikes
puts
13.46
11.81
10.26
8.83
7.53
6.36
50
52
54
56
58
60
0.66
1.00
1.44
2.00
2.68
3.50
Consider a ratio spread constructed using the 50-strike put and the 58-strike put options and the goal is to use the ratio spread to provide some downside protection with almost no cost. If the spot price of the underlying at expiration is 49, what is the profit or loss for this ratio spread per unit of the underlying asset?
A. 4.04 B. -4.96 C. -5.64 D. 3.04
calls
strikes
puts
13.46
11.81
10.26
8.83
7.53
6.36
50
52
54
56
58
60
0.66
1.00
1.44
2.00
2.68
3.50
Explanation / Answer
Considering the case where both the 50-strike put and the 58-strike put is bought to protect the investor from the downside in the prices, upfront premium needs to be paid.
So, We will pay 0.66 for 50-strike put and 2.68 for 58-strike put, giving us a total cost of 0.66+2.68 = 3.34.
Now, the payoff for a put option is (S-X,0)
In this case both are options is in-the-money.
Here, for both options strike price is 49.
Option 50-strike put is in-the-money and the profit is 50-49-0.66 = 0.34
Option 58-strike put is in-the-money and the profit is 58-49-2.68 = 6.32
So, the total profit earned is 0.34+6.32 = 6.66
The answer does not match with the given options. However, it will be great if you can check with the examiner if there is any mistake in the question as this is the best possible answer I can come up with. Let me know if you need more clarification on this.
Thanks
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