Consider an option strategy where the investor simultaneously buys one call with an exercise price of...
Consider an option strategy where the investor simultaneously buys one call with an exercise
price of $120 and sells one call with an exercise price of $110 both with the same expiration
date. Calculate the payoff of the strategy when spot price of the underlying is less than $110,
between $110 and $120, and greater than $120 at expiration. Draw a payoff diagram for this
strategy. What is the bet being made with this strategy?
Homework Answers
Table showing Payoff
| Price as on expiry |
Profit on call option bought ( Strike price 120$) Assuming premium paid to be 10$ |
Profit on call option Sold (Strike price 110$) Assuming premium received to be 20$ |
Net profit |
| 100 | -10 | 20 | 10 |
| 115 | -10 | 15 | 5 |
| 125 | -5 | 5 | 0 |
Call options gives the buyer right to buy the underlying share at specified price in future. This right is received by paying premium to the seller of call. Here it is assumed that call option with strike price of $110 is trading at 20$ and Call option with strike price 120$ is trading at 10$
Profit Diagram
by this strategy one is expecting that price of stock will remain below $120 by the expiry. Trader is bearish on the stock
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