Question

1) Suppose an investor buys three April $42 ABC Co. calls at $1.55 and simultaneously sells three April $36 calls at $3.40 when the stock is trading at $36.75 (each option relates to one stock) The maximum amount of loss is: Select one:

a. $5.55 b. Unlimited c. $12.45 d. $6.00

2) The gain or loss if the stock trades to $50 before the options expire is:

Select one:

a. Loss of $12.45 b. Unlimited gain c. Loss of $13.25 d. Gain of $5.55

Answer 1

Q1) C) $12.45

Explanation:

Maximum loss = 3 ( 42 - 36 + 3.40 - 1.55 )

= 3 ( -4.15)

= -$12.45

For any price above or at 42 the loss would be $12.45 .

Q2) B) loss of $12.45

Explanation:

Loss = 3 (long call - short call + short call premium - long call premium)

= 3 [Max (stock price - strike price, 0) - Max (stock price - strike price , 0) + 3.40 - 1.55 ]

= 3 [Max (50 - 42, 0) - Max (50 - 36, 0) + 1.85]

= 3 [Max (8,0) - Max (14 , 0) + 1.85 ]

= 3 [ 8 - 14 + 1.85]

= 3 [ -4.15]

= -$12.45