A put \"spread\" is the simultaneous purchase of 1 put with an exercise price of
ID: 2735244 • Letter: A
Question
A put "spread" is the simultaneous purchase of 1 put with an exercise price of $40, writing of 2 puts with an exercise price of $50, and purchase of 1 put with an exercise price of $60. All puts have the same maturity, and are on the same stock. What would be the payoff from this "spread", if the stock price is $39 at maturity? What would be the payoff from this "spread", if the stock price is $50 at maturity? What would be the payoff from this "spread", if the stock price is $61 at maturity? Graph the payoff structure of this "spread". What kind of probabilities does the creator of this "spread" have in his or her mind?Explanation / Answer
Stock price 39
E.P 40
E.P 50
E.P 60
Net payoff
Brought put
1
21
write put
-22
(11*2)
Total
1
-22
21
0
Stock price 50
E.P 40
E.P 50
E.P 60
Net payoff
Brought put
lapses
10
write put
lapses
Total
lapses
lapses
10
10
Stock price 61
E.P 40
E.P 50
E.P 60
Net payoff
Brought put
lapses
lapses
write put
lapses
Total
lapses
lapses
lapses
0
Stock price 39
E.P 40
E.P 50
E.P 60
Net payoff
Brought put
1
21
write put
-22
(11*2)
Total
1
-22
21
0
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