Question

9. Betty and Bob buy 200 shares of MCD at $68 per share and sell 3 October 70 Calls at $6 per share quoted price and buy 1 October 65 Put at $4 per share quoted price. If MCD is $71 per share at October Expiration then algebraically find the Profit or Loss in Total Dollars.

Answer 1

Profit from shares = (Sell price - buy price) * Number of shares

Profit from shares = (71 - 68) * 200 = $600

Profit from call option = -max(St - X, 0) + premium received

Profit = -max(71 - 70, 0) + 6

Profit = -1 + 6 = $5 per share

Each contract is for 100 shares. So profit from selling 3 call options = 5 * 3 * 100 = $1,500

Profit from buying put option

Profit = max(X - St, 0) - premium paid

Profit = max(65 - 71, 0) - 4

Profit = 0 - 4 = -$4

A loss of $4 per share

Total loss = 4 * 100 = $400

Total profit = 600 + 1500 - 400

Total profit = $1,700

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