Question

20) in June an investor forms a spread by selling an ABC 50 Call with September expiration for 52.34/Share, and purchasing an ABC 50 call with December expiration for $3.38/share. The investor plans to close out the time spread position in September at the time of the expiration of the September call option. The Black-Scholes value of an ABC 50 call option with six months until expiration is $1.24/share when ABC stock is trading at $45/share, and the Black-Scholes value of an ABC 50 call option with three months until expiration is $0.53/share when ABC is trading at $45/share. Assume option prices are equal to the corresponding Black-Scholes values. What is the profit/loss per share of the spread position, if ABC stock is trading at $45/share in September and the position is closed out?

Need help on 20. Thanks

Answer 1

Here, both the options have same exercise price of $50. On September at expiration of short call position both the option will be worthless. This is because the price of underlying stock $45 is lesser than the strike price. Thus, the investor will have a loss equal to the net investment of $1.04, that is the difference between the premium received of $2.34 and premium paid of $3.38.