Question: Consider the following options portfolio: You write a November 2014 expiration call option on Facebook with exercise price $80. You also write a November expiration

Consider the following options portfolio: You write a November 2014 expiration call option on Facebook with exercise price $80. You also write a November expiration Facebook put option with exercise price $75.

a. Graph the payoff of this portfolio at option expiration as a function of the stock price at that time.

b. What will be the profit/loss on this position if Facebook is selling at $77 on the option expiration date? What if it is selling at $83? Use option prices from Figure 15.1 to answer this question.

FIGURE 15.1

Options on Facebook, October 16, 2014

c. At what two stock prices will you just break even on your investment?
d. What kind of "bet" is this investor making; that is, what must this investor believe about the stock price in order to justify this position?

Underlying stock price = $75.95 Facebook (FB) Expiration Strike Call Put Oct-14 75 3.95 3.01 Oct-14 80 1.65 5.72 Nov-14 75 4.85 3.97 Nov-14 80 2.64 6.74

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