Several call options on Cuban Cigars Inc. are available for trading. The expiration date, strike price, and current premium for each of these options appears below.
| Strike |
Expiration |
Premium |
| $40 |
July |
$6 |
| $45 |
July |
$3.50 |
| $50 |
July |
$1.75 |
An investor decides to purchase one call, with a $40 strike, and one, with a $50 strike. At the same time, the investor sells two of the calls, with a $45 strike price. Draw a payoff diagram for this portfolio of options.
Your diagram should have two lines, one showing the portfolio's payoff on a gross basis, and one showing the payoff net of the cost of forming the portfolio.