Question

create a bull call spread using the following quotes:

Option type	Call on Stock ABC
Exercise price	$17.50	$20
Option premium	$5.50	$3.50

QUESTION:

- Explain how to create the bull spread by using the above options.

- Draw the profit and loss diagram of this strategy on the expiration date and complete the following table.

Profit/Loss and break-even points

P/L & BE points	Strategy
When S≤ $17.50	P/L=
When S≥ $20	P/L=
BE point =

Answer 1

To create a bull spread, two call option is purchased at different strike prices for the same stock and for same expiry.

In this situaiton, bull spread can be created by buying call option on exercise price $17.5 at $5.5; and selling call option for the strike price of $20 at $3.5.

So, $5.5 will be paid and $3.5 will be recieved, so the total cost will be = $2.