Question

ca call and a put that are equally out of the money call. All of the options in this Stock closed recently at $55 per share. The put 2 In options, a 'seagull position is where one writes a call and the money and at the same time one buts an at the mo position have the same date of expiration. Dator Stock cloe following are the most recent closing prices of July options Exercise price call $10.00 $7.15 $4.00 ull using the above options. $2.10 $4.80 $6.90 a) Describe the specific composition of the "seagull" using the above b) Find the cost of this position c) Write the specific profit function of this position d) Find the maximum loss of this position e) Find the maximum gain of this position f) Find the breakeven price(s) of this position g) Draw the profit loss diagram of this position showing all the relevant details

Answer 1

A. For seagull position based on the given data,

Sell call option of exercise price 60, sell put option of exercise price 50 and buy call option at exercise price of 55.

B.

Cost of position= 7.15-2.10-4.00= $1.05

C.

Profit Function= Max( Spot-55,0)- Max(spot-60,0)-Max(0,50-spot) - 7.15 +2.1 +4

D.

Max loss for this position= 50-2.1-4+7.5=$51.4

In worst case suppose spot price become 0. Then in that case both the call will not be exercised however the put will be exercised. Then, we have to $50. Apart from that the premium paid for the long position will also be part of loss while premium earned on short position will reduce the loss.