Texts: A fund manager is discussing potential strategies with one of her traders. Both are of the view that equity price volatility will increase. The trader argues that falling prices will drive volatility higher. The fund manager agrees with the trader, but the fund manager is concerned about general price swings in the equity market, which will also contribute to volatility. They observe the following call and put option quotes on the S&P 500:
Put; strike 2850; premium $122.50; 3 months
Call; strike 2850; premium $126.90; 3 months
What will be your potential maximum loss and breakeven points of the strategy? (Note: 1 contract buys 100 "shares" in the index)
A) Max loss = $24,940; breakeven index levels = 2600.60 & 3099.40
B) Max loss = $37,630; breakeven index levels = 2473.70 & 3038.15
C) Max loss = $37,190; breakeven index levels = 2664.05 & 3221.90
D) Max loss = unlimited; breakeven index levels = 2600.60 & 3099.40
E) Max loss = unlimited; breakeven index levels = 2664.05 & 3221.90
C is the answer.