Question

~~~In Excel~~~

Question 1. Common stock of a company is selling today for $53.69. Call options on the company expiring in 1-month with strike prices of $49 and $56 are selling for $4.80 and $0.36, respectively.

How would you form a bull call spread with the two options (state what kind of options you would buy or sell at what strike price to form a call spread)? What is the cost of each spread?

If you have $890 on hand, how many spread contracts (each contract=100 options) can you buy? Remember that you cannot buy fractional contracts.

Find the total amount of profit for a single bull call spread created using the two calls described above when for stock prices are at 45, 47.5, 50, 52.5, 55, 57.5 at expiration.

What is the maximum and minimum profit for a bull call spread created using the two calls described above?

Draw profit of both the call options along with profit diagram of the bull call spread. Clearly label each axis and indicate which line is what.

~~~In Excel~~~

Answer 1

Bull Call Spread, trade set up –

1. Buy $49 CE by paying $4.8 towards the premium. Since money is going out of my account this is a debit transaction
2. Sell $56 CE and receive $0.36 as premium. Since I receive money, this is a credit transaction
3. The net cash flow is the difference between the debit and credit i.e 4.8 – 0.36 = $4.44.

Total money in hand = $890

For buying 1 bull call spread option we will need $4.44, So for 1 spread contract we will need = 100*4.44 = $444.

So, we can buy only 2 spread contracts as the amount will be $888 (444*2)

As shown above in table:

Max profit will be = $512

Max loss will be = $888

Payoff Diagrams: