Question

You sell one Huge-Packing August 50 (strike price) call contract and sell oneHuge-Packing August 50 put contract. The call premium is $1.25 and the putpremium is $4.50. Your strategy will pay o only if the stock price is inAugust.a) either lower than $44.25 or higher than $55.75b) between $44.25 and $55.75c) higher than $55.75d) lower than $44.25

Answer 1

Answer:

The strategy only pays off when the stock price in August is between $44.25 and $55.75. Thus, the answer is b.

Explanation:

The investor net gain on premium from option is $1.25 + $4.5 = $5.75.

The investor has to obligation to buy at $50 and obligation to sell at $50 in August.

As a result, Investor paid-off is described according to the spot price, denoted 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.

Thus, the answer is b.