Question

You sell one Huge-Packing August 50 call contract and sell one Huge-Packing August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is (________) in August.

Answer 1

Answer:

if the stock price is between $44.25 and $55.75

Explanation:

Given that, the investor net gain on premium from option is $1.25 + $4.5 = $5.75.

Thus, the investor has to buy at $50 and obligation to sell at $50 in August.

Hence, investor paid-off is shown as x, of Hug-Packing in August as below:

Spot price <$50: 5.75 - (50 - x) = x - 44.25

Spot price = $50: $5.75

Spot price > $50 : 5.75 - ( x -50) = 55.75 - x

Thus, the strategy will pay off only when:

(x - 44.25) > 0 and (55.75 - x) <0 or x is between $44.25 and $55.75.