1. The price of a stock is $40. The price of a 1-year European put option on the stock with a strike of $30 is quoted as $7 and the price of a 1-year European call option on the stock with a strike of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a diagram illustrating how the investor’s P&L varies with the stock price over the next year.
2. Stock in CP Inc. is currently priced at $50 per share. A call option with a $50 strike and 90 days to maturity is quoted at $1.95. Compare the percentage gains and losses from a $97,500 investment in stock versus the option in 90 days for stock prices of $40, $50, and $60.