Question

An investor purchases a stock for $42 and a put for $0.70 with a strike price of $38. The investor sells a call for $0.70 with a strike price of $48. What is the maximum profit and loss for this position? (Loss amount should be indicated by a minus sign.) Maximum prolit Maximum loss

Answer 1

The maximum profit is $6 and maximum loss is -4$.

Define call option.

A call option gives the buyer the right to purchase the underlying at a future date and a put option gives the buyer the right to sell the underlying at the same future date.A company's profit and loss statement is created by deducting its entire revenue from all of its expenses, including taxes. Net income is the result, and depending on whether it is positive or negative, the business has either made a profit or a loss.

Here put option is bought and call option is sold ,

Therefore, Net premium = premium received - premium paid

                                         =0.7-0.7

                                         =0$

Table showing payoff is attached.

Thus maximum profit = $6 and Maximum loss = -4$

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