Problem 3 (32 points) You would like to construct a position that will have a co
ID: 2724937 • Letter: P
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Problem 3 (32 points) You would like to construct a position that will have a constant "ceiling" on the total profit if stock price goes down and a constant "floor" on the total loss if the price goes up. Use must use two put options to achieve this result. You have access to two put options with the following characteristics: Option A: strike price of $40, the price of this put option is $3 per share. Option B: strike price is $35, the price of this put option is $2 per share Both options have the same time to maturity and can only be excercised on expiration date. (a) Describe you position in the two put options. (8 points) Given your answer in part a answer parts b, c, d and e about the combined position. (b) What is your total profit or loss per share if the stock price is $38 at expiration? (5 points) (c.) What is your total profit or loss per share if the stock price is $5 at expiration? (5 points) (d) What is your total profit or loss per share if the stock price is $50 at expiration? (4 points) (e) Below draw the per share profit profiles for each of the options you have selected in part a and their combined (total) profit at expiration (label each axis, each profile and all breakeven points) (10 points) Problem 3 (32 points) You would like to construct a position that will have a constant "ceiling" on the total profit if stock price goes down and a constant "floor" on the total loss if the price goes up. Use must use two put options to achieve this result. You have access to two put options with the following characteristics: Option A: strike price of $40, the price of this put option is $3 per share. Option B: strike price is $35, the price of this put option is $2 per share Both options have the same time to maturity and can only be excercised on expiration date. (a) Describe you position in the two put options. (8 points) Given your answer in part a answer parts b, c, d and e about the combined position. (b) What is your total profit or loss per share if the stock price is $38 at expiration? (5 points) (c.) What is your total profit or loss per share if the stock price is $5 at expiration? (5 points) (d) What is your total profit or loss per share if the stock price is $50 at expiration? (4 points) (e) Below draw the per share profit profiles for each of the options you have selected in part a and their combined (total) profit at expiration (label each axis, each profile and all breakeven points) (10 points)Explanation / Answer
Following assumptions are taken as per details given in problem
they are 2 put options
option A when strike price is $40 the put option is$3 per share
option B when the strike price is $35 the put option is $2 per share
Both options have the same time to maturity and can only be excercised on expiration date.
a) We have to find out the premium paid in both the put options. let us understand that each contract will have 100 shares in option A the strike price is $ 40 and premium paid per share is $3 , so for 1 contract premium paid $300 ( $3 x 100)
in option B the strike price is $ 35 and premium paid per share is $2 , so for 1 contract premium paid $200 ( $2 x 100)
B) The profit in put option is calculated by following formula
Profit in put option = (strike price – current price)x 100 – premium amount paid
If strike price is less than current price the loss is the premium paid
The calculation of profit and loss is given below if the current price at expiration $38
35 put
40 put
total P&L
Price
$2.000
$3.0000
premiun paid
$200.00
$300.00
strike price
$35
$40
current price
$38
$38
profit / loss
($200.00)
($100.00)
($300.00)
The total loss per share in = -300 / 200 = $1.5
c) The profit in put option is calculated by following formula
Profit in put option = (strike price – current price) x 100 – premium amount paid
If strike price is less than current price the loss is the premium paid
The calculation of profit and loss is given below if the current price at expiration $5
$6,000.00
The total profit per share in = 6000 / 200 = $30
d) The profit in put option is calculated by following formula
Profit in put option = (strike price – current price)x 100 – premium amount paid
If strike price is less than current price the loss is the premium paid
The calculation of profit and loss is given below if the current price at expiration $50
($500.00)
The total loss per share in = -500/ 200 = $2.5
35 put
40 put
total P&L
Price
$2.000
$3.0000
premiun paid
$200.00
$300.00
strike price
$35
$40
current price
$38
$38
profit / loss
($200.00)
($100.00)
($300.00)
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