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A trader holds the following portfolio of options on a non-dividend paying stock. The stock is currently trading at $20 per share. Assume options are

  1. A trader holds the following portfolio of options on a non-dividend paying stock. The stock is currently trading at $20 per share. Assume options are written on 1 share of stock each. (10 pts)

Position

Strike Price

Premium

Short 1 call

$20

$3

Short 1 put

$20

$2

  1. Plot the profit/loss diagram for the portfolio. That is, plot the stock price at expiration (ST) on the horizontal axis and plot the net profit to the portfolio on the vertical axis. You can do this on the graph below or in Excel (attach). Label all important points, including break-even points, on your graph. Hint: if you do not know a shorter way to do this, start by making a table in Excel with a column of expiration stock prices and additional columns for each option payoff.

Profitt/Loss

b. Analyze the traders position. Short answer only, and put in terms of our key questions about an option positions profit profile.

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