12.11.6 You are bearish on the market (you think the market will go down) so you decide to use the following options, all with the same maturity: buy a put with K = $49 for $8, sell two puts with K = $40 for $5 each, and buying one put where K = $49 for $3. If at maturity the underlying trades at S = $34, what is the profit of your trade?
a) $3
b) $4
c) $5
d) $6
Above question is from your study notes. Answer was given as below
12.11.6 The profit from the trade is $4, thus (c) is correct. We can calculate this as follows: , meaning that at maturity the underlying is worthless than the strike of all the options. Accordingly, all the put options will get exercised. [( $49 - $34) - 2 x ( $40 - $34) + ( $36 - $34)] = $5. The initial option premiums sum up to: (-$8 +2x5 -3) = -$1. Thus $5 - $1 = $4.
I am not sure I follow the $36 - $34 for the 2nd put option that was bought. Can you please explain. Thanks.
a) $3
b) $4
c) $5
d) $6
Above question is from your study notes. Answer was given as below
12.11.6 The profit from the trade is $4, thus (c) is correct. We can calculate this as follows: , meaning that at maturity the underlying is worthless than the strike of all the options. Accordingly, all the put options will get exercised. [( $49 - $34) - 2 x ( $40 - $34) + ( $36 - $34)] = $5. The initial option premiums sum up to: (-$8 +2x5 -3) = -$1. Thus $5 - $1 = $4.
I am not sure I follow the $36 - $34 for the 2nd put option that was bought. Can you please explain. Thanks.
