Question

using the options below, please answer the following questions:

Option	Type	Strike	Premium
1	Call	40	10
2	Call	50	2
3	Put	40	3
4	Put	50	7

1. Which options would you buy (i.e. go long) or sell (i.e. go short) to create a BEAR CALL SPREAD strategy
2. Complete the payoff and profit table for the strategy in the table below. No need to create the graph.

ST	Payoff of option #__	Profit of option #__	Payoff of option #__	Profit of option #__	Net Payoff	Net Profit
30
40
50
60
70

Answer 1

Answer :

Bear Call spread wiil be created by creating long at higher strike price(i.e 50) and short at lower Strike Price. (i.e 40)

A.) So we will go long on Option 2 and go short on Option 1 ti create a bear Call spread.

B )Inflow of Premiun = $ 10

Outflow of Premium = $ 2

ST	Payoff of option Short at 40	Profit of option Short at 40 (Payoff +Inflow off Premium	Payoff of option Long at 50	Profit of option (Payoff - Outflow off Premium	Net Payoff	Net Profit
30	Lapse	$0 +$10 =$10	Lapse	$0-$2 =($2)	$0	$8
40	Indifferent	$0 +$10 =$10	Lapse	$0-$2 =($2)	$0	$8
50	Exercise ; Payoff = ($10)	($10) +$10 =$0	Indifferent	$0-$2 =($2)	($10)	($2)
60	Exercise ; Payoff = ($20)	($20) +$10 =($10)	Exercise ; Payoff = $10	$10-$2=$8	($10)	($2)
70	Exercise ; Payoff = ($30)	($30) +$10 =($20)	Exercise ; Payoff = $20	$20-$2=$18	($10)	($2)