Question

Piper purchased one IBM May $100 call option at $6 and wrote one IBM May $110 call at $2.5.

a. What is the maximum potential profit of this strategy?

b. What is Piper’s profit if at option expiration the stock is trading at $105?

c. What is the maximum loss from the strategy?

Answer 1

rate positively ..

Ans 1	Gain on strategy
	Profit on call buy =			Max of ( price on expiry/sales - Strike price, 0) - Premium paid
	Maximum gain on Call sale =			Minimum of ( price on expiry/sales - Strike price, 0)+Premium on call written
	Since strike price of call written is 110, therefore maximum gain will be at price of 110.
	Profit on call buy =			(110-100)-6
	Profit on call sale =			0+2.5
	Total gain =			(110-100)-6+2.5
				6.5
Ans 2	IF price is 105
	Profit on call buy =			(105-100)-6
	Profit on call sale =			0+2.5
	Total profit =			(105-100)-6+2.5
				1.5
Ans 3	Maximum loss will be when the call purchased is out of money means at or below $100
	Loss on call buy =			(100-100)-6
	Profit on call sale =			0+2.5
	Total profit =			(100-100)-6+2.5
				-3.5