Question

Consider two call options on the same underlying stock and same expiration date. You buy the call with X=40, and sell the call with X=50. What is the payoff from your position if the stock prices ends at $32? What is the highest payoff from this position? What is the lowest payoff from this position? When would you engage in such a position?

Answer 1

1. If the stock price is ending at 32, the premium which have been paid to me on selling of the call of $50, would be completely gained by me.

Whereas,the call option of $ 40 which I have bought,will also be lapsing without any value and I will be losing the premium paid on the call option.

the amount cannot be said because the value of premium has not given in the question.

2. highest pay off from this position would be when the shares are ending between $40 to 50. It will be because I will be able to exercise my call option which I have bought and the buyer would not be able to exercise the call option of $ 50.

3. Lowest payoff on this option would be when the share is expiring much beyond $50.

4. I will engage in such position when I will think that the stock price is going above $40 but not above$ 50.