The price of a stock is $40: Diagram and explain the effects of buying call options and put options

The price of a stock is $40. The price of a one year European put option on the stock with a strike price of $30 is quotes as $7 and the price of a one year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options.

Draw a diagram illustrating the investor`s profit or loss varies with the stock price over the next year. How does the answer change if the investor buys 100 shares, shorts 200 call options, and buys 200 put options.

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The price of a stock is $40. The price of a one year European put option on the stock with a strike price of $30 is quotes as $7 and the price of a one year european call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a diagram illustrating the investor's profit or loss varies with the stock price over the next year. How does the answer change if the investor buys 100 shares, shorts 200 call options, and buys 200 put options.
P0 = 40
Xp = 30
Put = 7
Xc = 50
Call = 5

- If the stock price drops below its strike price of put at $30, the put is in the money and the investor will use the put to hedge the price. He will then sell the 100 shares at ...

Solution Summary

The solution provides a detailed explanation of the results including mathematical calculations. The diagrams are represented in Excel to show potential profit and loss.

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QUESTION 1
Focus on the June 445 call. Suppose you bought this call at theprice indicated.
How high must AAPL's price rise at expiration to break even on this option?
QUESTION 2
Now, look at the June 445 put. Provide a table showing the profit at expiration to a put buyer across a range of stockprices.
QUESTION 3

1. Theprice of a stock is $40. Theprice of a one-year European put option on thestock with a strike price of $30 is quoted as $7 andtheprice of a one-year European call option on thestock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 calloptions, and buys 100 putoptions.

Consider the following table of American option prices of ABC Company at some date when thestock was selling at $80.50. All options expire one month later.
Strike price Market price of call Market price of put
80 2.50 2.20
85

Use the option quote information shown to answer the questions that follow. Thestockprice is currently selling for $83.
Option and NY Expiration Strike/Exercise Calls Puts
Close Price Vol. Last Vol. Last
RWJ

1) Portfolio 1 break-even. Draw the gross and net payoff diagrams for a portfolio which is constructed from buying one call option with a strike price $45.00 and selling one call option with a strike price of $50. The cost of the first option of $7.75 andthe cost of the second option is $3.50. Using your diagram, at what st