Question

If the May Facebook 59 call is selling for $1.25, and the Facebook 60 call is selling for $.75, construct a bear spread using these nearby 59 and 60 calls.

a. Construct a table showing profit and loss if the options expire when the stock price is $0, $58, $59, $60, $61, $65, and $70, for each part of the spread, and the net profit or loss for the entire spread position.

b. Draw a hockey stick diagram for the spread, clearly labeling all the critical points.

Answer 1

Answer:

Bear Call option strategy- This is an option strategy when trader is moderately bearsih towards a paticular security or market and there is more time to expiry. It is more or less similar to the bear put strategy. In this strategy, we choose options of the same underlying and expiry.

Implementation-

Buying 1 Out of the money call option (OTM)

Selling 1 In the money call option (ITM)

In this question, we will Buy call of strike 60 at $.75 and sell call of strike 59 at $1.25, when call is bought, premium is paid and call is sold, premium is received, so the net credit in this case:

Net credit = Premium received - Premium paid

Net Credit received : 1.25 - .75 = +5

Payoff at different expiry prices:

Expiry	Long call(60)	Short call(59)	Prem. Long call	Prem. short call	Net P/L
0			-.75	+1.25	+.5
58			-.75	+1.25	+.5
59			-.75	+1.25	+.5
60		-1	-.75	+1.25	-.5
61	+1	-2	-.75	+1.25	-.5
65	+5	-6	-.75	+1.25	-.5
70	+10	-11	-.75	+1.25	-.5

Spread = Difference between the strike prices

Spread: 60-59 = 1

Break even point = Lower strike + Net credit

BEP: 59 + .5 = 59.5

Maximum profit = Net credit i.e. .5

Maximum loss = Spread - Net credit

Maximum loss: 1 - .5 = .5