Problem 1: A trader wants to construct a top vertical combination: she sells a call option with a strike price of $60 and a put option with a strike price of $40. Both options have the same maturity. The call costs $5 and the put costs $7. a) Construct a table showing the payoff from the strategy.

b) Construct a table showing the profit from the strategy.

c) What is the profit/loss achieved on the strategy if the stock price at the option expiry is equal to $20?

d) What is the profit/loss achieved on the strategy if the stock price at the option expiry is equal to $50?

e) What is the profit/loss achieved on the strategy if the stock price at the option expiry is equal to $80?

f) What stock level(s) will result in zero profits?

g) Draw the profit diagram of such a strategy for different ranges of stock prices?

h) What is the possible risk that the trader is facing?