Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about  downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on December 21, 2021.  What will be net profit/loss per share on a long bull call spread if the stock price is $70 per share?

	A.	$14
	B.	$24
	C.	$34
	D.	$44

Answer 1

A long (Bull) call spread is an option strategy in which investor buy a call option and sell a call option at higher strike price, both option should have same expiration date.

To construct Long Bull call spread:

Buy Call ($40)

Short Call ($65)

$40 Call Price (C1) = $2.50

$65 Call Price (C2) = $1.50

K1 = $40

K2 = $65

Stock Price on maturity (ST) = $70

Net Profit/Loss of long call spread (P/L):

Correct answer: B. $24