Stairs up strategy

Question

The following Dec option prices were observed today, rounded to a dollar to simplify calculations. Assume that the options are European, and each one contract is written on 100 shares.

Call (bid) - $57 $55 $42 $40

Call (ask) - $58 $56 $43 $41

Strike - $180, $185, $215, $220

Put (bid) - $29, $31, $47, $49

Put (ask) - $30, $32, $48, $50

The stock is priced at $200. You buy 100 shares at this price and build the strategy shown on the figure below. Since the strategy has four corner points, you would need also four options to construct the strategy. These strike prices are set at $180, $185, $215, and $220.

Construct the strategy given in the graph above with put and call options, as needed, and hold them until expiration. Using the table answer the following questions:

(4 marks) Draw the strategy and its components.

(7 marks) Write the profit equation of the strategy, including its representation in all vertical

strips LL, L, M, R, and RR.

(2 marks) Calculate the maximum profit of the strategy.

(2 marks) Calculate the largest loss of the strategy.

(2 marks) Calculate the breakeven point(s) of the strategy.

(2 marks) Calculate the cost of placing the strategy.

Part 2

Figure 1 Initial stock position (green) & final strategy (red) p/l.

Note 1: Nice, clear drawing, formulas and calculations are expected.