Question

The following information is available on company ABC.

                                 CALLS                       PUTS

ABC   X         MAR   APR   MAY     MAR   APR   MAY

119  120        6        8        11          1         3        4

119  125        2        5          8           2          4       6

119 130        1        3          6           5          7       9

A bear money spread using the May 125 and 130 calls would involve what cash flow at maturity (CF_T) if the stock price of ABC at the May expiration is $127?

		None of these answers are correct
		CFT =- $200
		CFT = - $300
		CFT = + $100
		CFT = - $100

Answer 1

Bear money spread with call options means purchasing call options ar specific strike price while also selling same number of calls with same expiry, but at a lower strike price.

That means, here call options with strike price $130 is bought and that with $125 is sold.

On expiry, spot price is $127.

Therefore, call option with strike price of $130 will expire. The call option with strike price of $125 will be excercised which is sold in the spread.

Thus, there will be loss at maturity of $127-$125 per option. Thus loss per option at maturity will be $2 in bear call spread.