Question

An investor purchases a stock for $55 and a put for $0.75 with a strike price of $53. the investor sells a call for $0.75 with a strike price of $64.

Required: What are the maximum profit and loss for this position? (loss amount should be indicated by a minus sign.)

Answer 1

The maximum profit for this position is $2 and the maximum loss is $55.

Step-by-step explanation:

The maximum profit for this position can be calculated by adding the profit from the stock and the profit from the call option. The profit from the stock is calculated by subtracting the purchase price from the market price, so the maximum profit from the stock is $(-55 - (-53)) = $2. The profit from the call option is calculated by subtracting the purchase price from the strike price, so the maximum profit from the call option is $0. Therefore, the maximum profit for this position is $2 + $0 = $2.

The maximum loss for this position can be calculated by subtracting the profit from the put option from the purchase price of the stock. The profit from the put option is calculated by subtracting the strike price from the purchase price of the put option, so the maximum profit from the put option is $0. Therefore, the maximum loss for this position is $55 - $0 = $55.