Question

1. Six-month call options with strike prices of $20 and $26 cost $4 and $2, respectively. You plan to create a bull spread call (Buying a call spread) by trading a total of 100 options. Answer the following questions.?

Total amount of credit or debit:

Maximum amount of loss:

Maximum amount of profit:

Break-even stock price of this spread:

2. Six-month put options with strike prices of $40 and $45 cost $3 and $5, respectively. You plan to create a bull spread put (Selling a put spread) by trading a total of 300 options?

Total amount of credit or debit:

Maximum amount of loss:

Maximum amount of profit:

Break-even stock price of this spread:

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Answer 1

1. Six-month call options with strike prices of $20 and $26 cost $4 and $2, respectively. You plan to create a bull spread call (Buying a call spread) by trading a total of 100 options.

Each option is for 100 shares of the underlying. 100 options = 100 * 100 = 10,000 shares of the underlying

Total amount of credit or debit: It is a debit spread because we are paying $4 and getting $2.

Debit per share = 4 - 2 = $2.

Total debit = (4 - 2) * 10,000 = $20,000

Maximum amount of loss: The maximum loss = Total premium paid

The maximum loss = $20,000

Maximum amount of profit: The maximum profit = (Upper strike - Lower strike) * 10,000 - Total Debit

The maximum profit = (26 - 20) * 10,000 - 20,000

The maximum profit = 6 * 10,000 - 20,000

The maximum profit = $40,000

Break-even stock price of this spread: Breakeven price = Lower Strike + Debit per share

Breakeven price = 20 + 2 = $22

2. Six-month put options with strike prices of $40 and $45 cost $3 and $5, respectively. You plan to create a bull spread put (Selling a put spread) by trading a total of 300 options?

Each option is for 100 shares of the underlying. 100 options = 100 * 300 = 30,000 shares of the underlying

Total amount of credit or debit: It is a credit spread because we are selling a $45 put for $5 and buying a $40 put for $3.

Credit per share = 5 - 3 = $2

Total amount of credit = 2 * 30,000 = $60,000

Maximum amount of loss: The maximum amount of loss = (Upper strike - Lower strike) * 30,000 - Total Premium received

The maximum amount of loss = (45 - 40) * 30,000 - 60,000

The maximum amount of loss = $90,000

This happens when the stock expires below the lower strike price ($40)

Maximum amount of profit: Maximum profit is equal to the credit we have received

Maximum amount of profit = $60,000

This happens when the stock expires above the upper strike price ($45)

Break-even stock price of this spread: Breakeven price = Upper strike price - Credit per share

Breakeven price = 45 - 2

Breakeven price = $43