Question: A trader holds two calls and one put on the same share, all of which expiring in three months. The exercise price of both calls

A trader holds two calls and one put on the same share, all of which expiring in three months. The exercise price of both calls is $70 and the exercise of the put is $80. Each option is sold as a 100-share contract.

(i) Find the payoff at the expiration date if the stock sells for $65 and if it sells for 90$. Draw the payoff diagram (profile) for your option position. (3 points)

(ii) Using the above example as a base case (strike prices, long-short, type of assets etc), turn the position into (a) a short straddle and a long strangle (show both) (b) a butterfly with calls (c) a bear put spread (d) a collar (e) butterfly with calls (f) iron condor by making any changes you see fit. You can add or remove any assets you need but try to make as few changes as possible. Explain in detail the changes you make and the reasoning behind them. Construct the payoff profile for each position and explain its usefulness and aims.

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