Question

An investor purchases a stock for $38 and a put for $0.50 with a strike price of $35. The investor sells a call for $0.50 with a strike price of $40. What is the maximum profit and loss for this position? (Loss amount should be indicated by a minus sign.) Maximum profit Maximum loss

Answer 1

Maximum Profit can be computed with following equation:

$\textup{Maximum Profit = Strike of Short Call - Stock Price - Put Premium + Call premium}$

$\textup{Maximum Profit = 40 - 38 - 0.5 + 0.5}$

$\bg_green \large \textup{Maximum Profit = \$2}$

Maximum Loss can be computed with following equation:

$\textup{Maximum Loss = Strike Price of Put - Stock Price - Put premium + Call premium}$

$\textup{Maximum Loss = 35 - 38 - 0.5 + 0.5}$

$\bg_green \large \textup{Maximum Loss = -\$3}$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.