A put option with a strike price of $65 costs $8. A put option with a...

A put option with a strike price of $65 costs $8. A put option with a strike price of $75 costs $15.

1) How can a bull spread be created?

2) With the bull spread created above, what is the profit/loss if the stock price is $70?

3) With the bull spread created above, when would the investor gain a positive profit?

Solutions

Expert Solution

1) Bull Put Spread: Bull put spreads can be implemented by selling a higher strike ITM put option and buying a lower striking OTM put option on the same underlying stock with the same expiration date. SInce Spot is not given any of the Put option can be either OTM or ITM.

2. Selling ITM option (X-75) and Buying OTM option (X-65). With spot as 70, put @ 65 is OTM and Put @ 75(sold) ITM by $ 5. Net Prem =7. Profit =7-5=2.

3.when the stocke price is above 68, investor will earn a positive profit. Net profit out of premiums=7.

jeff jeffy answered 1 year ago

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