Question
In: Finance
9.A trader creates a bear spread by selling a six-month put option with a $50 strike...
9.A trader creates a bear spread by selling a six-month put option with a $50 strike price for $4.50 and buying a six-month put option with a $60 strike price for $9.50. What is the initial investment? What is the profit on the trade at maturity when the then stock price is (a) $46, (b) $56, and (c) $66?
Solutions
Expert Solution
Position:
Long put option strike of $60 @ $9.50
Short put option strike of $50 @ $4.50
Therefore, net investment = premium paid - premium received = 9.50 - 4.50 = $ 5.00
Profit at maturity:
| Spot at maturity | Value of long put option (Strike $60) | Value of Short put option (Strike $60) | Value of position | Premium paid | Net profit / (loss) |
| 46.00 | 14.00 | 4.00 | 10.00 | 5.00 | 5.00 |
| 56.00 | 4.00 | 0.00 | 4.00 | 5.00 | (-1.00) |
| 66.00 | 0.00 | 0.00 | 0.00 | 5.00 | (-5.00) |
jeff jeffy answered 10 months agoRelated Solutions
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