The price of the stock is $40. The price of a 1-year European put option on the stock with a strike price of $30
is quoted as $7 and the price of a 1 year European call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 100 shares, shorts 100 call options, and buys 100 put options. Draw a diagram illustrating how the investor’s profit or loss varies with the stock price over the next year. How does your answer change if the investor buys 100 shares, shorts 200 call options, and buys 200 put options?
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