Question

Suppose, you are an investment broker. Your client wants to take five option positions on the stock of Plumbus. The stock is currently trading at $40.

(1) She wants to buy a call option with a strike price of $40 at an option price of $4.
(2) She also wants to buy a put option with a strike of $45 at an option price of $10.
(3) She also wants to sell a second call option with a strike of $30, and an option price of $14.
(4) She also wants to sell a put option with a strike of $44, and an option price of $8.
(5) Finally, she wants to buy a call option with a strike price of $43, and an option price of $3.
Construct a profit diagram for this investment strategy. Create a graph of the portfolio payouts.

Answer 1

See picture answer in spread sheet.

Also a spreadsheet explanation of how the numbers are got.

Step-by-step explanation:

Payoff of a long call option = Max[S-X, 0] - P

Payoff of a short call option = P - Max[0, S-X]

Payoff of a long put option = Max[X-S, 0] - P

Payoff of a short put option = P - Max[0, X-S]

S = underlying price at expiry

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)