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8 Apr 2019

If you buy a call and sell a put option on the same underlying, at the same strike price, with the same option maturity, your possible payoff will look exactly like what other trading strategy? Explain. (Both options are European.)

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Deanna Hettinger
Deanna HettingerLv2
11 Apr 2019

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Related questions

a. What is the difference between the two primary kinds of options (puts and calls)? What is the difference between European and American options?

b. What is the difference between payoff and profit of an option? Which line (payoff, profit) should be lower when you draw the two lines on graph for a long call option?

c. How do you form a protective put? What is your maximum profit when you sell a straddle?

d. Given a 3-month put price is 4.5 at strike price of 57.5 on an asset that is currently trading at 55.17. Assume risk free rate to be 7%. What is the price of a call option with strike price of 57.5 with 3 month maturity on the same asset? Show how you got the value. (Hint: You can use Put-Call parity to solve this)

You purchase a 40-strike European call option on ABC stock, and you sell one 75- strike European call option on ABC stock. Both options have the same expiration date. Find the payoff (or value) of your option portfolio for each of the following two prices of QRS stock. a. On the options’ expiration date, ABC stock has a price of 59 b. On the options’ expiration date, ABC stock has a price of 91.

Q1. Put-call parity

Does put-call parity mean the put and the call option (of the same stock, with same expiration, with same strike price) have the same value/price?

If not, for put and call to have the same prices, what must be the relationship between the strike price and the current stock price?

Hint: Find the Apple option page from Yahoo Finance and look for the strike price where the call and put price are similar.

Q2.A European call option and a European put option on a stock both have the same strike price of $45 and expire in 6 months. Currently, the market call price is $10 and the put price is $6. The risk-free rate is 2% per annum, and the current stock price is $49. Identify the arbitrage opportunity open to the trader. All the interest rates are with continuous compounding.

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