Question:

Suppose you are given the following prices for the options on ABC stock:

Strike (in $)

15.0 2.0 1.6

17.5 2.6 1.1

20.0 3.3 0.8

a) One column refers to the call prices, and the other column refers to the prices on the put, however, the columns are not labeled. Which is the call (put)? Why?

b) Suppose you take the following position: long one call with strike 15.0, short two calls with strike 17.5, and long one call with strike 20.0. Please draw the payoff at maturity. Please, mark the maximum payoff on the vertical axis.

c) What would be the total gain (loss) on the above position if the stock price at maturity turned out to be S(T) = 19.0 (taking into account the price of the options)?

d) For what values of the underlying stock does the holder of the above position breakeven?

e) Suppose you decide to buy a 15.0 straddle (1 long call + 1 long put with the same strike of 15.0). Please draw the payoff at maturity. On the vertical axis mark the payoff that corresponds to S(T) = $19.0.

f) Over what range of underlying stock price at maturity will you gain money (after taking into account the price you paid for the options)?