Question

Below is a list of call and put option premiums with different strike prices. The options mature 1 year later.

Strike Put Call price 850158.70 59.20 900132.45 80.04 950109.68 104.35

The current stock price is 900. The risk-free interest rate is 6% p.a., continuously compounded.

(i) Find out the cost of the following payoff diagram:

(ii) Find out the cost of the following payoff diagram:

(iii) Find out the cost of the following payoff diagram:

(iv) Find out the cost of the following payoff diagram:

(v) What is the price such that the above strategy is break-even?

Answer 1

i)

It is a long straddle position where one purchase put and call at same strike ie.e 900

Hence total cost=132.45+80.04=$212.49

ii)

It is a long strangle.

850 put is bought and 950 call is bought

=59.2 ca9.68

=168.88

iii)

Butterfly spread

Sell 2 900 call

Buy 1 850 call

buy 1 950 call

=-158.7+132.45+132.45-109.68

=-3.48 hence it is not cost but profit

iv)

buy 850 put and sell 950 call

=59.2-109.68=

-50.48

Again this is a profit