Question

AstraZeneca plc (AZN) stock was trading at $45 on August 3, 2011 and the following options prices are available:

SEPT 40 put - $1.50

SEPT 50 put - $6

SEPT 40 call - $6

SEPT 50 call - $1

A) What would you do to take a bull spread position using put options?

B) What is the net premium or cost of such a spread? Indicate whether you have to pay or to receive net premium.

C) What is the maximum gain possible on expiration?

D) What is the maximum loss possible on expiration?

E) What is the break-even point of AZN on expiration?

Answer 1

A)

A bull put spread is undertaken when the trader is bullish on the company. The trader would write put options at a higher exercise price and buy options at a lower exercise price to profit from the difference in premiums.

Sell Sept 50 put at $6

Buy Sept 40 put at $1.50

B)

A net premium of $5.50 ($6-$1.5) will be received.

C)

The maximum profit is the net premium received which is $5.50

D)

The maximum loss is calculated when the the share price of AZN is zero.The trader will face a loss of $4.5 (50-40-5.5). $50 is the exercise price at which the trader has written an option, $40 is the exercise price at which the trader has bought the option, $5.50 is the net premium received.

E)

The net premium received is $5.50, for a break-even point there has to be a negative of $5.50. At a price of $44.50, the loss on the exercise of the option written will be proportional to the net premium received. (50 - 44.5 + 5.50 = 0)