Question

show all work and graph

Southwest Airlines Options ( January 2020 expiration) Stock price $57.38 Calls Puts Strike $50 $55 $60 $70 Bid 0.20 1.30 Ask 0.45 Bid 7.70 3.70 1.10 0.04 Ask 7.90 3.80 1.25 0.10 1.45 4.30 18.60 4.10 17.20

Answer 1

Payoff of a short call option = P - Max[0, S-X]

Payoff of a short put option = P - Max[0, X-S]

S = underlying price at expiry,

X = strike price

P = premium received (written options receive premium)

Premium received on writing $55 call option = $3.70.

Premium received on writing $55 put option = $1.30.

AB 1 Payoffs Stock price at Short Call Short Put Net 2 expiry ($55) ($55) Payoff $40 $3.70 ($13.70) ($10.00) $45 $3.70 ($8.70) ($5.00) $50 $3.70 ($3.70) $0.00 $55 $3.70 $1.30 $5.00 $60 ($1.30) $1.30 $0.00 $65 ($6.30) $1.30 ($5.00) $70 ($11.30) $1.30 ($10.00)

Payoffs Stock price 2 at expiry 3 40 4 45 5 50 6 55 7 60 8 65 9 70 10 Short Call ($55) Short Put($55) Net Payoff =3.7-MAX(0,A3-55) =1.3-MAX(0,55-A3) =SUM(B3:C3) =3.7-MAX(0, A4-55) =1.3-MAX(0,55-A4) =SUM(B4:04) =3.7-MAX(0,A5-55) =1.3-MAX(0,55-A5) =SUM(B5:05) =3.7-MAX(0, A6-55) =1.3-MAX(0,55-A6) =SUM(B6:06) =3.7-MAX(0, A7-55) =1.3-MAX(0,55-A7) =SUM(B7:07) -3.7-MAX(0,A8-55) =1.3-MAX(0,55-A8) =SUM(B8:08) =3.7-MAX(0,49-55) =1.3-MAX(0,55-A9) =SUM(B9:09)

$10.00 $5.00 $0.00 $40 $45 $50 $55 $ 60 $65 $70 -Short Call ($55) Short Put ($55) ($5.00) -Net Payoff ($10.00) ($15.00)

The name of this position is "short straddle"