1. To analyze the profit and loss possibilities inherent in the option investment strategies, please perform the following analyses for call and put options on Lotuss common stock that mature in February 1994 and that have an exercise price of $55 per share.

a. Compute net profits and losses per share (actual dollar profit and losses, not rates of return) at expiration (February 19, 1994) for the following investment strategies:

• Buying a call option on Lotuss stock;
• Writing a call option on Lotuss common stock;
• Buying a put option on Lotuss common stock;
• Writing a put option on Lotuss common stock.

Hint: Start by calculating the profit or loss per share assuming that, by February 19, 1994, Lotuss common stock is selling at, say, $60 per share. Repeat this calculation for several other possible stock prices at the time of expiration that span a wide range above, below and at the exercise price of $55 per share (e.g., $45, $50, $55, $65, and so on.)

b. For each of the option investment strategies listed above, draw a graph relating possible profits and losses per share to Lotuss stock price at the time of expiration. Put profit and losses per share on the vertical axis of your graph and stock prices on the horizontal axis.

c. Compute profits and losses per share, and graph them against stock prices for the strategy of buying a share of Lotuss common stock at $55 per share and holding it until February 19, 1994.