Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / An investor is decided to buy a call option with a strike price of $45 for $5 and buy a call option with the strike price of $55 for $1, simultaneously sells two call option with a strike price of $50 for $3, when the stock price turn to be $30, what is the profit or loss on the option strategy?
An investor is decided to buy a call option with a strike price of $45 for $5 and buy a call option with the strike price of $55 for $1, simultaneously sells two call option with a strike price of $50 for $3, when the stock price turn to be $30, what is the profit or loss on the option strategy?
We know that when we buy a call option we get a right to buy and when we sell a call option we will have an obligation to sell.
Accordingly we will tabulate all the four options their pay offs and profits below.
| Type of option | Market Price | Buy/Sell | Exercise Price | (Price Paid)/ Received | Exercise/Lapse | Profit or loss | Remarks |
| Call | 30 | Buy | 45 | -5 | Lapse | -5 | Working Note-1 |
| Call | 30 | Buy | 55 | -1 | Lapse | -1 | Working Note-2 |
| Call | 30 | Sell | 50 | 3 | Lapse | 3 | Working Note-3 |
| Call | 30 | Sell | 50 | 3 | Lapse | 3 | Working Note-4 |
Working Note-1 - We have a right to buy at 45 in market it is 30 so we will lapse the option as market price is lower but we will lose the price paid on options
Working Note -2 - We have a right to buy at 55 in market it is 30 so we will lapse the option as market price is lower but we will lose the price paid on options
Working Note-3 - When ever we sold an option we will get obligation and the purchaser will get right so we have to check from the purchaser of option point of view . The other person has a right to buy at 50 but in market it is 30 so he will lapse his right. We will get profit of amount recived on sale of option
Working Note-4- When ever we sold an option we will get obligation and the purchaser will get right so we have to check from the purchaser of option point of view . The other person has a right to buy at 50 but in market it is 30 so he will lapse his right. We will get profit of amount recived on sale of option
Hence the total profit from the option strategy will be -5-1+3+3 = 0
We don't have any profit or loss from the strategy
