Question

The following prices are available for call and put options on a stock priced at $60. The risk-free rate is 4 percent and the volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining.

	Calls		Puts
Strike	March	June	March	June
55	7.2	8.4	1.7	2.9
60	2.5	3.7	3.2	4.8
65	1.8	2.4	6.4	7.5

For questions 19 through 23, consider a bull money spread using the March 55/60 calls.

19.       How much will the spread cost?

20.       What is the maximum profit on the spread?

21.       What is the maximum loss on the spread?

22.       What is the profit if the stock price at expiration is $59?

23.       What is the breakeven point?

Answer 1

Bull Money spread using the March 55/60 calls

.1. Buy March Call strike price $55:

Call premium Cost = $7.20

Sell March Call strike Price=60

Call Premium Received = $2.50

Net cost of the spread=(7.20-2.50) = $ 4.70

Cost of Each spread of one share= $4.70

Cost of 100 Shares = $470

2.Maximum profit on spread:

Gain from each Share = $5 ($60 - 55)

Gain from 100 Shares = $5 * 100 = $500

Cost of spread= $470

Net profit = $500 - 470 = $30

3.Maximum Loss on spread:

Maximum loss= cost of spread=$470

4.Profit if stock price at expiration is $59

Gain from long call at $45=(59-55)=4

Gain/loss on short call at $60=0

Gain for 100 shares=100*4=$400

Cost of spread =$470

Net Loss= Cost of spread- gain from Call = (470 - 400)=$70

5. Break even point;

Breakeven price at expiration price=long call Strike Price + Cost of Spread One Share = 55 + 4.70 = 59.70