You can find the payoff or net profit of a combination of option positions by merely adding the payoffs or net profits of the individual positions.
1) For practice, first consider a long call option position with a strike price of $50 and a premium of $3. Create a table and graph the payoff and net profit of this option as function of ST, the stock price at maturity. Vary ST from $40 to $60 in increments of $2.
2) A straddle is a position that is long both a call and a put with the same strike price. Consider such a position with a strike price of $50. The premium for the call is $3 and the premium for the put is $2. Create a table and graph the overall payoff and net profit of this position as function of ST, the stock price at maturity. Vary ST from $40 to $60 in increments of $2.
What might your view be about ST if you were to take such a position? To answer this question, assume that the current stock price is $50
3) A strangle is a position that is long both a call and a put with the put having a lower strike price than the call. Consider such a position with the put having a strike price of $48 and the call having a strike price of $52. The premium for the call is $1.50 and the premium for the put is $.50. Create a table and graph the overall payoff and net profit of this position as function of ST, the stock price at maturity. Vary ST from $40 to $60 in increments of $2.
How might your view about ST be different from a view that would cause you to take the straddle in the previous problem? To answer this question, assume again that the current stock price is $50.
Sample Solution