A trader wants to construct a top vertical combination: she sells a call option with...
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A trader wants to construct a top vertical combination: she sells a call option with a strike price of $60 and a put option with a strike price of $40. Both options have the same maturity. The call costs $5 and the put costs $7. a) Construct a table showing the payoff from the strategy. (3 pts) b) Construct a table showing the profit from the strategy. (3 pts) c) What is the profit/loss achieved on the strategy if the stock price at the option expiry is equal to $20? (1 pts) d) What is the profit/loss achieved on the strategy if the stock price at the option expiry is equal to $50? (1 pts) e) What is the profit/loss achieved on the strategy if the stock price at the option expiry is equal to $80? (1 pts) f) What stock level(s) will result in zero profits? (2 pts) g) Draw the profit diagram of such a strategy for different ranges of stock prices? (2 pts) h) What is the possible risk that the trader is facing? (1 pt)
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