You are long call spread. The initial individual options prices are c(40) = $2.78 and c(45) = $0.97.

You are long call spread. The initial individual options prices are c(40) = $2.78 and c(45) = $0.97. The relevant interest rate is 8.33% and it is 0.25 years to expiry. At expiration, the stock finishes at $44. Calculate the net P&L of the call spread

Expert Solution

The Call spread is constructed by buying the lower strike call option and Selling the higher strike call option.

The Net premium paid in Long call spread = $2.78- $0.97 = $1.81

Value of Call option at maturity = max(Stock price at maturity - strike price, 0)

So, Value of $40 strike call option at maturity (long) = max(44-40,0) = $4

Value of $45 strike call option at maturity (Short) = max(44-45,0) = 0

Net profit from the position = Net payoff - future value of net premium paid

= ($4-$0) - $1.81*(1+0.0833*0.25)

=$2.15

jeff jeffy answered 2 years ago

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