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.

Construct a table (3 raws & 8 columns) 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

Answer 1

Bear spread is constructed by selling (short) the $59 call and buying (long) the $60 call.

Profit of bear spread = profit of short call + profit of long call

Profit of a long call option = Max[S-X, 0] - P

Profit of a short call option = P - Max[0, S-X]

S = underlying price at expiry,

X = strike price

P = premium paid or received (long options involve paying premium, and short options receive premium)