Traders can use multiple strategies when they are bullish on the stock of a company. Two examples are

(i) writing a put option and

(ii) buying a call option. Let us assume the stock does not pay a dividend.

a) Draw the payoff diagram at maturity for the put option and the call option. The put option has a strike price of $40, and it trades for $2. The call option has a strike price of $45, and it trades for $1.

b) List the maximum possible gains and losses for each strategy.

c) If the option is European style, it can only be exercised at maturity. American style options can be exercised at any time. Explain how this affects the strategies of the option seller and of the option buyer.