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Consider the following trading strategy: (1) Buy a put option with a maturity of one year and a strike price of $41 and a premium
Consider the following trading strategy: (1) Buy a put option with a maturity of one year and a strike price of $41 and a premium of $4. (2) Write a put option with a maturity of one year and a strike price of $36 and a premium of $2. This strategy is known as a spread. The annual risk-free rate is 10%. All option contracts in this question have the same underlying asset. The underlying asset currently has a price of $38. Plot the profit line for the spread. What is the break-even price(s)? When would you use this strategy?
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