Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You...

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 $10 per share?

A.

-$1.0

B.

$24

C.

$14

D.

$28

Homework Answers

Answer #1

Under long bull call spread, call option will lower strike price is bought and call option with higher strike price is sold simultaneously.

Call option is the right to buy the underlying asset at a specified price on a future date.

Since the market price at maturity is lower than the strike price, the call options will not be exercised as it is better to buy from the market.

Profit = Premium received – premium paid

= $1.50-$2.50

= -$1.0

Hence, the answer is A.

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