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 3 months. The price of a 3-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

Selling a strap entails selling two calls and selling one put. Initial income = 2C₀ + P₀ = [(2)(4) + 3](100) = $1,100. If the final stock price is $42, the position profit is found as Profit = [−2Max ($0, $42 − 40) + Max ($0, $40 − $42)](100) + $1,100 = $700

The Common Stock of the Avalon Corporation Has Been Trading