15) An investor purchases a stock for $48 and a put for $.40 with a strike price

Question

15) An investor purchases a stock for $48 and a put for $.40 with a strike price of $42. The investor sells a call for $.40 with a strike price of $55. What is the maximum profit and loss for this position? (Loss amount should be indicated by a minus sign.)

15) An investor purchases a stock for $48 and a put for $.40 with a strike price of $42. The investor sells a call for $.40 with a strike price of $55. What is the maximum profit and loss for this position? (Loss amount should be indicated by a minus sign.)

Explanation / Answer

The investor has stopped its loss by a taking put option and limit its profit by writing a call option. This type of strategy is known as collar option. In this strategy maximum profit and maximum loss is as follows:

Maximum Profit = 55 - 48 + 0.4 - 0.4 = $7

Maximum Loss = 48 - 42 + 0.4 - 0.4 = $6

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