Question

A stock is currently priced at $130. The following options, with expiration in 4 months, are...

A stock is currently priced at $130. The following options, with expiration in 4 months, are available:

K c p
120 12.80 1.85
125 8.65 3.11
130 5.05 4.85
135 2.61 7.55
140 1.10 11

Use call options with strike prices of 130 and 135 to create a bull spread. What is the breakeven stock price (in 4 months)?

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Answer #1

In bull spread , call option whith lower strike is bought and call option with higher strike price is sold. This strategy is used when investor expects moderate rise in price of asset

Here Call option with strike price of $ 130 is bought and Call option with strike price of $ 135 is sold

Thus net premium paid = Premium paid for buying call option with strike price of $ 130 - Premium received for selling call option with strike price of $135

= 5.05 - 2.61

= $ 2.44

Break even price = strike price of call option purchased + Net Premium paid

= 130 + 2.44

= 132.44 $

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