Question
An option trader buys a $40 put option for $4.2 per share and simultaneously sells a $35 put option for $1.3 per share. Both put
An option trader buys a $40 put option for $4.2 per share and simultaneously sells a $35 put option for $1.3 per share. Both put options have the same expiration.
a) Write out the mathematical formula for calculating the profit/loss from this strategy.
b) Is this a bull spread or bear spread?
c) Calculate the profit/loss from this strategy when the price of the underlying stock is $26, $38, and $50, respectively, on the expiration date.
d) Plot the profit/loss pattern from both puts and the spread on the same graph.
e) Use Goal Seek or Solver to find the break-even stock price.
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