You own a call option and put option that both have the same exercise price of $50, and their respective prices are $4 and $3. The stock is currently trading at $60. Calculate the dollar return on this strategy.
A) $1.00
B) $2.00
C) $3.00
D) $4.00
E) $5.00

Question

Quizplus · Accepted Answer

Since the call option has a premium of $4 and the stock is trading at $60, the call option is in the money and has a value of $10 ($60 - $50). This means that the gross profit from the call option is $6 ($10 - $4 premium).

Similarly, the put option has a premium of $3 and the stock is trading at $60, so the put option is out of the money and has no intrinsic value. Therefore, the gross profit from the put option is simply the premium of $3.

The dollar return on the strategy is the sum of the gross profits from the call and put options, which is $6 + $3 = $9. However, we also need to subtract the cost of buying both options, which is $4 + $3 = $7.

Therefore, the net dollar return on the strategy is $2. This corresponds to choice C.

You Own a Call Option and Put Option That Both