1. Construct profit diagrams at expiration time to show what position in IBM puts, calls and/or underlying stock best expresses the investors objectives described below.

   IBM currently sells for $150 so that profit diagrams between $100 and $200 in $10 increments are appropriate. Also assume that at-the-money puts and calls currently

cost $20 each. The call with strike $140 costs $25 and the call with strike $160 costs $17.

1. (a) An investor wants to benefit from IBM price drops, but does not want to lose more than $20 on the investment.

2. (b) An investor wants to capture profits if IBM price declines and losses if IBM price increases. The investor wants to break even if IBM price does not change.

3. (c) An investor wants to bet that the upcoming IBM earnings announcement is very close to market expectationsmeaning that the price will not move by more than $10 dollars.