Master of Finance - the Strike Values and Prices Problem

Name: Tianyi Gu       Major: Master of Finance       Net Id: tianyig2

Name C(1), C(2), C(3), C(4) for the call options with strike price of $57, $57.5, $58, $58.5, respectively. And same for the put options so as to get P(1), P(2), P(3), P(4). The strike values and prices of each options are shown in the following diagram.  Name K as the strike price of options, St as the spot price (stock price) and P as the profit at maturity.

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A)

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Stock represents shorting 100 shares of stocks.

C(3) represents longing a 58 call.

P(1) represents shorting a 57put.

The Combo represents the profit of the combination, the curve bends at St=57, St=58.

When St<$57, p=64.4583

When $57

When St>58, p= 35.5437

An equivalent strategy is to short a put at 57, long a put at 58 (Treat the option contract as an option on a single share)

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B)

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P(2) represents selling one 57.5 put.

C(4) represents selling one 58.5 call.

The combo represents the profit at maturity of the combination. The kinks are St=57.5, St=58.5.

St<57.5, P=St-57.2294

57.5

St>58.5, P=58.7706-St

An equivalent strategy will be sell one 57.5 call, sell one 58.5 put. The Profit at maturity is shown as the following.

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C)

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C(3) represents buying one 58 call.

P(3) represents selling one 58 put.

The combo represents the profit at maturity and the curve has no kink.

P=St-57.8396

An equivalent strategy is to buy one 57.5 call, sell one 57.5 put.

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D)

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C(1) represents shorting a call at 57.

C(4) represents longing a call at 58.5.