Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51 per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $51 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $49 and ________ if the price per barrel is $55.
A) −$4; $2
B) −$2; $0
C) $0; $2
D) $0; −$4
E) −$2; $4

Question

Quizplus · Accepted Answer

When the market price is $49, the call option is out of the money and has no value, but the sold put option is in the money, and the investor has to buy oil at $51, losing $2 per barrel. When the market price is $55, the call option is in the money, giving the investor a gain of $4 per barrel (since they can buy oil at $51 and it's worth $55), and the sold put option is out of the money and has no value.

Suppose an Investor Buys a Call Option on 45,000 Barrels