Question

ou write a call option with X = $55 and buy a call with X = $65. The options are on

the same stock and have the same expiration date. One of the calls sells for $3; the other

sells for $9. What is the break-even point for this strategy?

Answer 1

As the Strike price of $55 is less than $65, so lower strike for call option can be considered ITM call. So ITM call will have higher premium. So as the investor wrote call with higher premium, so he received $9 and paid $3 for the call bought.

Net Inflow in the strategy = Premium received - Premium earned

= 9 - 3

= 6

So if the stock price starts to rise above $55, then the investor will start to pay as he has written call on $55. Now the break-even point will be

= Strike Price + Initial Inflow

= 55 + 6

= 61

So $61 is the breakeven point