Question

Asha buys a call with strike $85 and sells a call with strike $110 on S&P-500. The $85 strike call costs $10 while the $110 strike costs $8. Asha’s maximum profit on this strategy is:

a. Infinity

b. $27

c. $23

d. $25

Answer 1

To understand this situation, let us take 2 extreme cases:

Case 1: Expiry at $150

• Profit in long call (strike $85) = Selling price - Buying price = ($150 - $85) - $10 = $55
• Profit in short call (strike $110) = Selling price - Buying price = $8 - ($150 - $110) = -$32
• Net Profit = $55 - $32 = $23

Case 1: Expiry at $70

• Profit in long call (strike $85) = Selling price - Buying price = $0 - $10 = -$10
• Profit in short call (strike $110) = Selling price - Buying price = $8 - $0 = $8
• Net Profit = -$10 + $8 = -$2

Hence, the max profit in this case will be $23.

The correct answer is option C ($23).