2. (15 points) Suppose that you traded the following options on Facebook’s stock: a. Sold 1 call...
2. (15 points) Suppose that you traded the following options on Facebook’s stock:
a. Sold 1 call option with an exercise price of $250 at the price of $40;
b. Sold 1 put option with an exercise price of $250 at the price of $30; and
c. Bought 1 call option with an exercise price of $300 at the price of $22.
Also, suppose that:
i. All options are European;
ii. The options expire one year from now; and
iii. As usual, each option gives the right to buy (sell) 1 share.
Construct a table with the payoffs and profits (one year from now) for your combined position.
Homework Answers
Call option gives it's buyer right to buy underlying at specified price in future. Thus for call option to get exercised market price as at expiry must be greater than strike price
Put option gives it's buyer right to sell underlying at specified price in future. Thus for put option to get exercised strike price must be greater than market price as at expiry
Call/put writers receives premium and Call/put buyer pays premium
Thus Total premium received = $40 +$30 -$22
=$48
Table showing Payoff
| Price as at expiry | Sold 1 call option with an exercise price of $250 | Sold 1 put option with an exercise price of $250 | Bought 1 call option with an exercise price of $300 | Net premium received | Total profit /Loss |
| 240 | 0 | -10 | 0 | 48 | 38 |
| 241 | 0 | -9 | 0 | 48 | 39 |
| 242 | 0 | -8 | 0 | 48 | 40 |
| 243 | 0 | -7 | 0 | 48 | 41 |
| 244 | 0 | -6 | 0 | 48 | 42 |
| 245 | 0 | -5 | 0 | 48 | 43 |
| 246 | 0 | -4 | 0 | 48 | 44 |
| 247 | 0 | -3 | 0 | 48 | 45 |
| 248 | 0 | -2 | 0 | 48 | 46 |
| 249 | 0 | -1 | 0 | 48 | 47 |
| 250 | 0 | 0 | 0 | 48 | 48 |
| 251 | -1 | 0 | 0 | 48 | 47 |
| 252 | -2 | 0 | 0 | 48 | 46 |
| 253 | -3 | 0 | 0 | 48 | 45 |
| 254 | -4 | 0 | 0 | 48 | 44 |
| 255 | -5 | 0 | 0 | 48 | 43 |
| 256 | -6 | 0 | 0 | 48 | 42 |
| 257 | -7 | 0 | 0 | 48 | 41 |
| 258 | -8 | 0 | 0 | 48 | 40 |
| 259 | -9 | 0 | 0 | 48 | 39 |
| 260 | -10 | 0 | 0 | 48 | 38 |
| 261 | -11 | 0 | 0 | 48 | 37 |
| 262 | -12 | 0 | 0 | 48 | 36 |
| 263 | -13 | 0 | 0 | 48 | 35 |
| 264 | -14 | 0 | 0 | 48 | 34 |
| 265 | -15 | 0 | 0 | 48 | 33 |
| 266 | -16 | 0 | 0 | 48 | 32 |
| 267 | -17 | 0 | 0 | 48 | 31 |
| 268 | -18 | 0 | 0 | 48 | 30 |
| 269 | -19 | 0 | 0 | 48 | 29 |
| 270 | -20 | 0 | 0 | 48 | 28 |
| 271 | -21 | 0 | 0 | 48 | 27 |
| 272 | -22 | 0 | 0 | 48 | 26 |
| 273 | -23 | 0 | 0 | 48 | 25 |
| 274 | -24 | 0 | 0 | 48 | 24 |
| 275 | -25 | 0 | 0 | 48 | 23 |
| 276 | -26 | 0 | 0 | 48 | 22 |
| 277 | -27 | 0 | 0 | 48 | 21 |
| 278 | -28 | 0 | 0 | 48 | 20 |
| 279 | -29 | 0 | 0 | 48 | 19 |
| 280 | -30 | 0 | 0 | 48 | 18 |
| 281 | -31 | 0 | 0 | 48 | 17 |
| 282 | -32 | 0 | 0 | 48 | 16 |
| 283 | -33 | 0 | 0 | 48 | 15 |
| 284 | -34 | 0 | 0 | 48 | 14 |
| 285 | -35 | 0 | 0 | 48 | 13 |
| 286 | -36 | 0 | 0 | 48 | 12 |
| 287 | -37 | 0 | 0 | 48 | 11 |
| 288 | -38 | 0 | 0 | 48 | 10 |
| 289 | -39 | 0 | 0 | 48 | 9 |
| 290 | -40 | 0 | 0 | 48 | 8 |
| 291 | -41 | 0 | 0 | 48 | 7 |
| 292 | -42 | 0 | 0 | 48 | 6 |
| 293 | -43 | 0 | 0 | 48 | 5 |
| 294 | -44 | 0 | 0 | 48 | 4 |
| 295 | -45 | 0 |
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