Suppose you combine two option contracts as follows. You buy a call option on a stock with an exercise price of $65 for a premium of 9$. At the same time you sell a call option on the same stock with an exercise price of $75 for a premium of $4. Both calls expire at the same time. The stock sells currently at $72. Answer the following questions about this investment strategy: 1. Determinethevalueatexpiration(thepayoffs)andtheprofitunderthefollowingoutcomes: a. The price of the stock at expiration is $78 b. The price of the stock at expiration is $69 c. Thepriceofthestockatexpirationis$62 2. Determine the following: a. The maximum profit b. The maximum loss 3. Determinethebreakevenstockpriceatexpiration(thestockpriceforwhichyourstrategydeliversno profit and no loss). 4. Depictthepayoffandprofitdiagramsofyourinvestmentstrategy.
Suppose you combine two option contracts as follows. You buy a call option on a stock with an exercise price of $65 for a premium of 9$. At the same time you sell a call option on the same stock with an exercise price of $75 for a premium of $4. Both calls expire at the same time. The stock sells currently at $72. Answer the following questions about this investment strategy:
1. Determinethevalueatexpiration(thepayoffs)andtheprofitunderthefollowingoutcomes: a. The price of the stock at expiration is $78
b. The price of the stock at expiration is $69
c. Thepriceofthestockatexpirationis$62
2. Determine the following:
a. The maximum profit
b. The maximum loss
3. Determinethebreakevenstockpriceatexpiration(thestockpriceforwhichyourstrategydeliversno
4. Depictthepayoffandprofitdiagramsofyourinvestmentstrategy.
Net initial outflow=Premium paid-premium received
Step by step
Solved in 2 steps
