The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4.
-Suppose you write a strap and the stock price winds up to be $42 at contract expiration.What was your net profit on the strap?
A) $200
B) $300
C) $700
D) $400

Question

Quizplus · Accepted Answer

The net profit on the strap is the difference between the premium received for writing the strap and the loss on the put option. The premium received for writing the strap is $700 (the sum of the call premium and the put premium). The loss on the put option is $200 (the difference between the exercise price and the stock price at expiration). Therefore, the net profit on the strap is $700 - $200 = $500.

The Common Stock of the Avalon Corporation Has Been Trading