Reference no: EM131987087

A one-year call option on a stock with strike price of $45 costs $5 and a one-year put option on a stock with strike price of $35 costs $3. Suppose that a trader short two put options and short one call option.

a. What is the breakeven stock price, below which the trader will lose money?

K=       45        C=       5                                                         

K=       35        P=       3                                                         

Total premium collected =      11

When the stock goes below $35, a decline of $1 in the share price will lose $2 from short two puts. The share needs to go down by $5.5 ($11/2) from $35 to lose the $11 collected.                                                                               

           x=35-11/2=29.5                                 

b. What is the breakeven stock price, above which the trader will lose money?

When the stock goes above $45, a rise of $1 in the share price will lose $1 from short one call. The share needs to go up by $11 from $45 to lose the $11 collected.                                                                                

            S=45+11=56    

The professor has provided answers for both A and B. As you can see, the answers are not detailed enough making it difficult for me to figure out where he got those numbers. Please show me how he arrived at those answers and show me your work in detail so I can understand it better for both A and B. Thank you. It would help me a lot.