Question

Suppose I set up an investment strategy in the following way: I buy a call option contract, strike price $50, for a premium of $5 I write a call option contract, strike price $55, for a premium of $2 Assume that the options are on the same underlying asset, have the same expiry date and are both on 1 unit of the underlying asset. Construct a chart of the profit/loss at expiry, considering future asset prices from $20 to $80 in $5 increments. (Hint: do the calculations for each contract separately, and then just add the results together to get the answer for the strategy)

Answer 1

Option is a derivative which gives its holder a right to buy or sell underlying assets but not the obligation on expiration date at specific price. There are two parties of Option -

• Option buyer - who buy option
• Option writer - who sell option

Please refer to below spreadsheet for calculation and answer also the plot of Profit and loss. Formula reference also provided for better understanding.

Formula reference -

Hope this will help. if you need any further explanation please comment.