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An investor purchases a call option with an exercise price of $55 for $2.60. The same...

An investor purchases a call option with an exercise price of $55 for $2.60. The same investor sells a call on the same security with an exercise price of $60 for $1.40. Will the investor follow this strategy when his expectations are bearish or bullish? explain

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Answer #1

Trader Buy Call and Short call at different strike (With Short Call at higher strike). This strategy is known as Bull Spread strategy.

Trader benefits when the Stock price is between the 2 strikes. For rise in stock price above the Short Call Strike, trader benefits from buying the Call option at lower strike.

So with this strategy, upside potential is experienced from long Call and lower side losses are limited due to writing the Call.  

Thus trader executes this strategy when he is Bullish on the stock, by writing call at higher strike..

Below is the Payoff and Profit diagram for Bull Spread

日勺 Jan2 Excel File Insert Page Layout Formulas Data Review View BI Publisher Tell me what you want to do Cut Calibri General 晒Copy ▼ Paste Insert Delete B l u▼ ー▼ ク. ▲▼ Merge & Center ▼ $▼ 96 , 08,08 Conditional Format as Cell Format Painter Formatting Table Styles- Clipboarod Font Alignment Number Styles Cells 04 1 Long Call 2 Short Call 3 Strike 4 Spot 2.60 at Strike $1.40 at Strike X-$55 x=$60 Long Call Payoff Short Call Payoff Total P/L ($1.20) ($2.60) ($2.60 ($2.60) ($2.60) ($2.60 ($2.60 ($1.60) 0.60) 0.40 1.40 $2.40 $3.40 $4.40 $5.40 $6.40 $7.40 $1.40 $1.40 $1.40 $1.40 (S1.20) $1.40 $1.40 $1.40 $1.40 $1.40 $1.40 $1.40 Bull Spread Payoff ($1.20) $5.00 $4.00 3.00 $2.00 1.00 0.00 (S1.00) ($2.00) $53 ($1.20) ($0.20) $0.80 $1.80 $2.80 $3.80 $3.80 $3.80 $3.80 $3.80 $3.80 13 $50 $51 $52 S53 $54 $55 856 $57 $58 $59 S60 $61 $62 S63 S64 $65 15 ($0.60) ($1.60) ($2.60) $63 Bull Spread Payoff 20 Straddle ④ Ready O Type here to search 123

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