Answer:
Maximum profit= $2 while
Maximum loss= -$3.
Explanation:
This is seen to be a zero cost collar and is calculation is as shown below;
Maximum profit = $40 - $38 = $2
Maximum loss = $35 - $38 = -$3.
The option position described is a zero cost collar. This is so because the premium paid for the protective put is offset by the premium received for writing a covered call while the collar here will put a band around the prospective returns by limiting the upside and downside of position. The upside will be limited by the strike price on the covered call which is $40, while the downside will be limited by the strike price of the put being $35.
