Construct profitt diagrams or profit tables on expiration to show what position in IBM puts, calls and/or underlying stock best expresses the investor's objectives described below. As- sume IBM currently sells for $150 so that prot diagrams/ tables between $100 and $200 (in $10 increments) are appropriate. Also assume that "at the money" puts and calls cost $15 each. (As usual, the prot calculations ignore dividends and interest.)
(a) An investor wants upside potential if IBM increases but wants (net) losses no greater than $15 if prices decline.
(b) An investor wants to capture prots if IBM declines in price but wants a guaranteed limited loss if prices increase.
(c) An investor wants to capture prots if IBM declines in price and is ready to accept unlimited losses if prices increase. Further, the investor wants to break even if the stock price does not change between now and the maturity of the options.
(d) An investor wants to prot if IBM's upcoming earnings announcement is either unex- pectedly good or disappointingly bad.