Consider the following options portfolio. You write a January expiration call option on IBM with exercise price $195. You write a January IBM put option with exercise price $190.

a. Graph the payoff of this portfolio at option expiration as a function of IBM's stock price at that time.

b. What will be the profit/loss on this position if IBM is selling at $198 on the option expiration date? What if IBM is selling at $205? Use The Wall Street Journal listing from Figure 20.1 to answer this question.

c. At what two stock prices will you just break even on your investment?

d. What kind of "bet" is this investor making; that is, what must this investor believe about IBM's stock price to justify this position?

Figure 20.1

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PRICES AT CLOSE JANUARY 18, 2013 Underlying Stock Price: 194.47 Open Open Expiration Strike Lost Volume Interest Lost Volume Interest a 185 Jan Feb 185 10.60 299 185 12.00 185 4.35 190 2 1.82 710 345 06 3.60 104 2047 15 5697 175 507 2496 41 37 134 6.5 isu .119 190 190 190 10.95 195 lon Feb 402 2808 3.00 3553 10377 85 107 1866 5.20 52 2177 5 645 8.54 6 1142 Jan Fab 001 2451 11718 0.70 4090886 65 1337 11902 5.00 860 3156 95 5.90 1785 2928 7.30 934 1141 95 845 13 5773 10.B5 22 3419 tiu ish 10 1248 2966 5.55 637 6199 1.61 1053 5530 8.09 546 967 200 370 200 6.10 80 1257 629 3236 10.05 375 1903 1105