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In: Finance

Assume a stock is currently trading at $150. One call option has a strike price of...

Assume a stock is currently trading at $150. One call option has a strike price of $145 and costs $10, and another call option has a strike price of $155 and costs $5. Show the gross and net pay-off table of a Bull spread on call option, and show the graph of the net payoff diagram. Hint: Consider the three possible stock positions: S ≤ K1,K1 < S < K2, S ≥ K2.

Solutions

Expert Solution

Strike price 1, K1 = $145

Price 1, C1 = $10

Strike price 2, K2 = $155

Price 2, C2 = $5

Bull call spread is constructed buy purchasing $145 strike call option by paying $10 and selling $155 strike call option and receive $5

Net premium paid = 10 - 5 = $5

Bull call spread gross payoff = max(S - K1, 0) - max(S - K2, 0)

Bull call spread net payoff = Bull call spread payoff - Net premium paid

Screenshot with formulas

jeff jeffy answered 2 years ago
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