Consider the following options portfolio. You write an October 1 expiration call option on Microsoft with exercise price $300. You write an October 1 put option with exercise price $290.

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

b. What will be the profit/loss on this position if Microsoft is selling at $296 on the option expiration date? What if it is selling at $304? Use the data in 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 the stock price to justify this position? P-639