Question

Assume you have been given $400,000 CAD with access to all listed stocks, bonds, futures, and options worldwide. You can trade in options and futures, in combination with the underlying asset. Assume today is Feb 1, 2020 and you have been given $400,000 CAD fake money to trade until April 20, 2020.

Perform a bull spread (either call or put) strategy.

Describe the trade and provide the reason for such trade.

Please provide table and or/ graph.

Answer 1

Bull spread:

Hold: Lower strike price

Write: Higher strike price

Bear spread :

Hold: Higher strike price

Write: Lower strike price

Eg: Bull spread with put

Consider two puts on the same underlying stock. The puts have the same expiration date and exercise prices of Rs.80,90.If the put cost Rs.4 and Rs.12, respectively. Perform a bull spread strategy.

Ans. Hold Put at lower strike price.Rs.80

          Write put at higher strike price.Rs.90

FSP	Put-Hold (80)	Put write (90)	Bull spread payoff(Net)
	Value of put	premium	payoff	Value of put	premium	payoff
70	10	-4	6	-20	12	-8	-2
75	5	-4	1	-15	12	-3	-2
80	0	-4	-4	-10	12	2	-2
85	0	-4	-4	-5	12	7	3
90	0	-4	-4	0	12	12	8
95	0	-4	-4	0	12	12	8
100	0	-4	-4	0	12	12	8
105	0	-4	-4	0	12	12	8
110	0	-4	-4	0	12	12	8

Stock price of expiration	Position Value Expiration (-ve 8(12-4))	Payoff at expiration
70	-10	-2
75	-10	-2
80	-10	-2
85	-5	3
90	0	8
95	0	8
100	0	8
105	0	8
110	0	8

Analysis:

Situation	status
FSP<80	The net premium received =8 Loss due to spread=10 Net loss=2
FSP>90	Profit of Rs.8 due to the net premium received
FSP 80 to 82	Loss

Note: for put option breakeven FSP=Strike price-Premium

In the above problem, the investor is receiving net premium hence he is a net writer so we should adjust from writing price

Graph