Question

Assume you are buying stock today in Exxon. You buy a share of stock at 90,

and a put option at 88 expiring in three months for 4.117 You sell a call option at

88 expiring in three months for 2.80. You hold your portfolio until the

expiration date. On the expiration date you cash out your portfolio. Graph the

profits of your strategy (that is, how much your portfolio is worth in three months

minus what you paid for it today) as the price of Exxon stock at the expiration

date goes from 70 to 110.

Answer 1

Table showing payoff

Price as at expiry	Profit/loss on put option bought Strike price =88$	Profit/loss on call option sold Strike price =88$	Profit/loss on stock bought	Premium paid =4.117-2.8 =1.317 $	Net profit/loss
70	18		-20.00	-1.317	-3.32
71	17		-19.00	-1.317	-3.32
72	16		-18.00	-1.317	-3.32
73	15		-17.00	-1.317	-3.32
74	14		-16.00	-1.317	-3.32
75	13		-15.00	-1.317	-3.32
76	12		-14.00	-1.317	-3.32
77	11		-13.00	-1.317	-3.32
78	10		-12.00	-1.317	-3.32
79	9		-11.00	-1.317	-3.32
80	8		-10.00	-1.317	-3.32
81	7		-9.00	-1.317	-3.32
82	6		-8.00	-1.317	-3.32
83	5		-7.00	-1.317	-3.32
84	4		-6.00	-1.317	-3.32
85	3		-5.00	-1.317	-3.32
86	2		-4.00	-1.317	-3.32
87	1		-3.00	-1.317	-3.32
88	0		-2.00	-1.317	-3.32
89		-1.00	-1.00	-1.317	-3.32
90		-2.00	0.00	-1.317	-3.32
91		-3.00	1.00	-1.317	-3.32
92		-4.00	2.00	-1.317	-3.32
93		-5.00	3.00	-1.317	-3.32
94		-6.00	4.00	-1.317	-3.32
95		-7.00	5.00	-1.317	-3.32
96		-8.00	6.00	-1.317	-3.32
97		-9.00	7.00	-1.317	-3.32
98		-10.00	8.00	-1.317	-3.32
99		-11.00	9.00	-1.317	-3.32
100		-12.00	10.00	-1.317	-3.32
101		-13.00	11.00	-1.317	-3.32
102		-14.00	12.00	-1.317	-3.32
103		-15.00	13.00	-1.317	-3.32
104		-16.00	14.00	-1.317	-3.32
105		-17.00	15.00	-1.317	-3.32
106		-18.00	16.00	-1.317	-3.32
107		-19.00	17.00	-1.317	-3.32
108		-20.00	18.00	-1.317	-3.32
109		-21.00	19.00	-1.317	-3.32
110		-22.00	20.00	-1.317	-3.32

Thus there will be loss of 3.32 at any given price

Profit graph

Net profit/loss 0.00 170 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100 102 104 105 108 110 -0.50 — Net profit/loss -3.00 -3.50