Question

An investor purchases a stock for $40 and a put for $0.60 with a strike price of $34. The investor sells a call for $0.60 with a strike price of $44. What is the maximum profit and loss for this position?

Answer 1

Answer:

Therefore, the maximum profit is $4 and the maximum loss is -$6

Explanation:

The computation is shown below:

In the case of put option

Profit or loss = Strike price of the good - purchase price of good

                      = $34 - $40

                      = -$6

In the case of call option

Profit or loss = Strike price of the good - purchase price of good

                      = $44 - $40

                      = $4

Therefore, the maximum profit is $4 and the maximum loss is -$6