Question

14.   Suppose you purchase one IBM May 100 call contract (a call expires in May with an exercise price of $100) at $5 and write one IBM May 105 call contract (a call expires in May with an exercise price of $105) at $2.    How much would be your profits, if, at expiration, the price of a share of IBM stock is $100, $103, and $105 respectively?

a.   -$3, $0, $2

2. -$3, -$2, $2
3. $2, $0, $5
4. $2, $0, -$3

Answer 1

Correct answer: a. -$3, $0, $2

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

F D Cost $5.00 $2.00 Strike Price $100.00 $105.00 Long IBM May 100 Short IBM May 105 Profit Stock Price on expiration $100.00 $103.00 $105.00 -$3 $0 $2

Cell reference -

А В Strike Price Cost Long IBM May 100 Short IBM May 105 100 105 5 Stock Price on expiration 100 103 Profit =MAX(B6-$C$2,0)-MAX(B6-$C$3,0)+$D$3-$D$2 =MAX(B7-$C$2,0)-MAX(B7-$C$3,0)+$D$3-$D$2 =MAX(B8-$C$2,0)-MAX(B8-$C$3,0)+$D$3-$D$2 105

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.