An investor has a short position in both a call and a put options on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $35. For opening short positions an investor had received a premium of 1$ for the put option and $2 for the call option. 1) Plot the value of this combination as a function of the stock price on the exercise date without taking into account the cost of options (draw a payoff diagram for options at expiration). 2) Plot the value of this combination as a function of the stock price on the exercise date taking into account the cost of options (draw a profit diagram for the investor at expiration). 3) Explain what does the investor expect when he is forming such a portfolio.
An investor has a short position in both a call and a put options on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $35. For opening short positions an investor had received a premium of 1$ for the put option and $2 for the call option. 1) Plot the value of this combination as a function of the stock price on the exercise date without taking into account the cost of options (draw a payoff diagram for options at expiration). 2) Plot the value of this combination as a function of the stock price on the exercise date taking into account the cost of options (draw a profit diagram for the investor at expiration). 3) Explain what does the investor expect when he is forming such a portfolio.
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:An investor has a short position in both a call and a put options
on the same share of stock with the same exercise date. The
exercise price of the call is $40 and the exercise price of the put
is $35. For opening short positions an investor had received a
premium of 1$ for the put option and $2 for the call option.
1) Plot the value of this combination as a function of the stock
price on the exercise date without taking into account the
cost of options (draw a payoff diagram for options at
expiration).
2) Plot the value of this combination as a function of the stock
price on the exercise date taking into account the cost of
options (draw a profit diagram for the investor at
expiration).
3) Explain what does the investor expect when he is forming
such a portfolio.
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