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

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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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