Homework Answers
A call option pays off if the stock price at maturity is higher than the strike price and 0 payoff if the stock price at maturity is lower than the strike price
If the stock price ends up at $32
Payoff from 40 strike long call = 0
Payoff from 30 strike long call = 32-30 = $2
Payoff from two 35 strike short call = 0
Total payoff = $2
Highest payoff
Highest payoff
| Payoff | ||||
| Stock price | $40 strike long call | $30 strike long call | Two $35 strike short call | Total payoff |
| 25 | 0 | 0 | 0 | 0 |
| 26 | 0 | 0 | 0 | 0 |
| 27 | 0 | 0 | 0 | 0 |
| 28 | 0 | 0 | 0 | 0 |
| 29 | 0 | 0 | 0 | 0 |
| 30 | 0 | 0 | 0 | 0 |
| 31 | 0 | 1 | 0 | 1 |
| 32 | 0 | 2 | 0 | 2 |
| 33 | 0 | 3 | 0 | 3 |
| 34 | 0 | 4 | 0 | 4 |
| 35 | 0 | 5 | 0 | 5 |
| 36 | 0 | 6 | -2 | 4 |
| 37 | 0 | 7 | -4 | 3 |
| 38 | 0 | 8 | -6 | 2 |
| 39 | 0 | 9 | -8 | 1 |
| 40 | 0 | 10 | -10 | 0 |
| 41 | 1 | 11 | -12 | 0 |
| 42 | 2 | 12 | -14 | 0 |
| 43 | 3 | 13 | -16 | 0 |
| 44 | 4 | 14 | -18 | 0 |
| 45 | 5 | 15 | -20 | 0 |
Highest payoff from this position is $5
Lowest payoff from this position is $0
The expectations are that the stock price at maturity would stay between $30 and $40 ( Since there is a positive payoff)
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