A trader buys a put option with strike $85 and buys a call option with a strike of $95, both with the same maturity T, with 2 months to expiration. The call option trades at $4 and the put option trades at $4.50. The current share price is $90. If the trader holds this position until the expiration date, what are the "breakeven share prices"? What is the "maximum gain" and the "maximum loss" that the trader could make on this trade? In which scenarios would the trader make the maximum gain and the maximum loss? This position is a type of "option combination", what is this type of combination called? Is the trader's overall position long or short volatility? Explain how volatility skew would affect this trading strategy.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A trader buys a put option with strike $85 and buys a call option with a
strike of $95, both with the same maturity T, with 2 months to expiration.
The call option trades at $4 and the put option trades at $4.50. The current
share price is $90.
If the trader holds this position until the expiration date, what are the
"breakeven share prices"? What is the "maximum gain" and the "maximum
loss" that the trader could make on this trade? In which scenarios would the
trader make the maximum gain and the maximum loss? This position is a type
of "option combination", what is this type of combination called? Is the
trader's overall position long or short volatility? Explain how volatility skew
would affect this trading strategy.
Transcribed Image Text:A trader buys a put option with strike $85 and buys a call option with a strike of $95, both with the same maturity T, with 2 months to expiration. The call option trades at $4 and the put option trades at $4.50. The current share price is $90. If the trader holds this position until the expiration date, what are the "breakeven share prices"? What is the "maximum gain" and the "maximum loss" that the trader could make on this trade? In which scenarios would the trader make the maximum gain and the maximum loss? This position is a type of "option combination", what is this type of combination called? Is the trader's overall position long or short volatility? Explain how volatility skew would affect this trading strategy.
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