Thank you for visiting Mathew simultaneously sold a July 40 put on ZXY stock for 200 and bought a July 35 put for 75 His maximum loss is and. This page is designed to guide you through key points and clear explanations related to the topic at hand. We aim to make your learning experience smooth, insightful, and informative. Dive in and discover the answers you're looking for!
Answer :
Mathew's maximum loss is -$120 and his maximum gain is $125. So, the correct answer is D) $275; $125.
Mathew sold a July 40 put on ZXY stock for $200 and bought a July 35 put for $75. To determine Mathew's maximum loss and maximum gain, we need to understand the options positions.
When Mathew sells a put, he receives a premium (in this case, $200) but is obligated to buy the stock at the strike price ($40) if the stock price falls below the strike price. This means that if the stock price drops significantly, Mathew could incur a large loss.
On the other hand, when Mathew buys a put, he pays a premium (in this case, $75) to have the right to sell the stock at the strike price ($35) if the stock price falls below the strike price. This put option helps protect him from large losses if the stock price decreases.
To calculate the maximum loss, we consider the scenario where the stock price drops to zero. In this case, Mathew would be obligated to buy the stock at the strike price of $40 but can only sell it for $35. Therefore, his maximum loss would be the difference between the strike prices ($40 - $35) multiplied by the number of shares (1 in this case) minus the total premium received ($200 - $75). The maximum loss is
($40 - $35) * 1 - ($200 - $75)
= $5 - $125
= -$120.
To calculate the maximum gain, we consider the scenario where the stock price remains above the strike price of both options. In this case, Mathew keeps both premiums received ($200 - $75 = $125).
Therefore, Mathew's maximum loss is -$120 and his maximum gain is $125. So, the correct answer is D) $275; $125.
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