Interview Question - Options

I just got this interview question and am not sure if I gave the correct answer. Bascially the question is how to get the payoff used in the diagram to the left using options. The diagram is basically a call spread, but instead of there being an upward sloping diagonal line connecting the two flat horizontal payoffs from the options, the call spread is pushed together so there is no diagonal line.

How do you generate this payoff diagram using options?

Thanks.

 

If you buy a call and short a put at the same strike price, you can get that shape. However, the put must be more expensive than the call for graph to be positive. For European options, this happens when D + X e^[-r(T-t)] -So > 0, D= PV of dividends, X= strike price, So=current price of stock.

 

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