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**Payoff - Cost And Profit**

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**1. a) Write down the profit equation for a long call bull spread.**

**Answer: **Equation: Max Profit: Option Premium + Difference in strike price of OTM & ATM call options

Min Profit: Option Premium

Profit: Option Premium + (Ending price - strike price of ATM call)

**b) What are the payoff, cost and profit of a long call bull spread with strike prices of $1,125 and 1,240 if the GOOG share price become $1,210.55 on the expiration date?**

**Answer: **Payoff: 1210.55-1125 = 84.45

Cost:120.3 - 54.5 = 65.80

Profit: 84.45 -65.80 = 18.65

**c) What are the payoff, cost and profit of a long put bear spread with strike prices of $1,125 and 1,240 if the GOOG share price becomes $1,210.55 on the expiration date?**

**Answer: **Payoff: 1240-1210.55 = 29.45

Cost:95.60 - 42.60 = 53

Profit: 29.45 -53 = (23.55)

**d) Calculate the payoff, cost and profit from a long box spread based on (b) and (c). What strategy is better (call bull/put bear/box)? Explain.**

**Answer: **Payoff: 84.45 + 29.45 = 113.90

Cost:65.80 + 53 = 118.80

Profit: 113.90 - 118.80 = (4.90)

Which strategy & why? The strategy of a long call bull spread is better as it gives more profit than the other two strategies

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**2. (a) If you feel that Stock price can go up to $1,400 or can go down to $1,000, but you aren't sure about the direction, what strategy would be more appropriate when you choose options with strike price of 1,220. Calculate the payoff and profit of the strategy.**

**Answer: **Strategy: Long Straddle (Buy one put and one call option at same strike price i.e., 1220)

Payoff: If price= 1400, Payoff from call option = 1400-1220 = 180

If price= 1000, Payoff from put option= 1220-1000 = 220

Profit: If price= 1400, Profit= 180 - 65.40 - 84.50 = 30.10

If price= 1000, Profit= 220 -66.80 - 79.40 = 70.10

**(b) At what stock price(s) your profit would be zero in the above case.**

**Answer:** Option cost = 149.10.

Hence, if price = 1220 + 149.10 = 1369.10 or price = 1220 - 149.10 = 1070.90, the profits would be zero.

Therefore, prices = 1369.10/1070.90

**(c) If you expect stock price is more likely to go up to $1,400, what strategy would better serve you? Calculate payoff and profit of the strategy.**

**Answer: **A protective put strategy (buying stock and buying put) at a strike price of 1000 shall be bought.

Payoff: NIL

Profit: 1400-1185.55-16.5 = 197.95

**(d) Calculate the range of stock prices beyond which your profit would be positive if you follow the strategy in (c)?**

**Answer:** Put option price at 1000 = 16.50

Therefore, any stock price above (1185.55+16.50=) 1202.05 shall yield positive profit results.

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