We consider the following options strategy on a stock and its total payoff at the expiry date of the short-term option.

Option Type, Position, Remaining life, Strike: Option1: Call, Long x 1, 0, 100 Option 2: Call, Short x 2, 0.25, 120

For the options with a remaining life, we use BSM model to determine their values. We assume a volatility of 30% and a risk-free rate of 4%.

(a) Compute the total payoff for S = 100, 120 and 150.

(b) Use Excel to draw the payoff pattern for prices between $60 and $160 with a step of $5.