Question

The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 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 |

45 |
6.84 |
8.41 |
1.18 |
2.09 |

50 |
3.82 |
5.58 |
3.08 |
4.13 |

55 |
1.89 |
3.54 |
6.08 |
6.93 |

Use this information to answer the following questions. Assume that each transaction consists of one contract for 100 shares. Consider a bull call spread using the March 45/50 calls. A bull call spread consists of one long call with a lower strike price and one short call with a higher strike price. Also, Briefly discuss why you would use a bull call spread in terms of risk?

- How much will the spread cost?
- What is the maximum profit on the spread? Maximum loss?
- What is the profit or loss if the stock price at expiration is $47?
- What is the breakeven point?

Answer #1

A bull call spread is executed when the view on the underlying asset is bullish but one does not see the underlying breach a particular level on the up side. It is a cost reduction structure. It is a net premium paying structure. If the stock price at maturity is below the level of Buy Call, then one loses only to the extent of the net premium paid for going long the Bull Call Spread

a. 6.84 - 3.82 = USD 3.02

b. The maximum profit on the spread: SC strike - BC strike - net premium = 50 - 45 - 3.02 = USD 1.98.

Maximum Loss = Net premium paid = USD 3.02

c. If stock price at expiration = 47, payoff = 47 - 45 - 3.02 = Loss of USD 1.02

d. Break even point is where one would recoup the net premium paid = 45 + 3.02 = USD 48.02

The following prices are available for call and put options on a
stock priced at $50. The risk-free rate is 6 percent and the
volatility is 0.35. The March options have 90 days remaining and
the June options have 180 days remaining.
Strike
March (calls)
June (calls)
March (puts)
June (puts)
45
6.84
8.41
1.18
2.09
50
3.82
5.58
3.08
4.13
55
1.89
3.54
6.08
6.93
Use this information to answer the following questions. Assume
that each transaction consists of...

The following prices are available for call and put options on a
stock priced at $50. The risk-free rate is 6 percent and the
volatility is 0.35. The March options have 90 days remaining and
the June options have 180 days remaining. The Black-Scholes model
was used to obtain the prices.
Calls
Puts
Strike
March
June
March
June
45
6.84
8.41
1.18
2.09
50
3.82
5.58
3.08
4.13
55
1.89
3.54
6.08
6.93
. Use the June/March 50 call spread....

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. ...

~~~In Excel~~~
Question 1. Common stock of a company is
selling today for $53.69. Call options on the company expiring in
1-month with strike prices of $49 and $56 are selling for $4.80 and
$0.36, respectively.
How would you form a bull call spread with the two options
(state what kind of options you would buy or sell at what strike
price to form a call spread)? What is the cost of each spread?
If you have $890 on hand,...

Suppose that call options on a stock with strike prices $300
and $345 cost $30 and $25, respectively. How can the options be
used to create a bull spread?
Call 1 – Strike $300: Position Long or short?__________
Call 2 – Strike $345: Position Long or
short?__________
I. Construct
a table that shows the profit and payoff for the spread.
II. When
is the Maximum profit? How much?
III. Draw
a diagram for the spread showing the total...

XYZ Stock currently trades for $45 per share. You find the
following options matrix (prices of calls and puts) for a June 1st
expiration date (which applies for all)
40 strike call option:
$9
40 strike put option: $2
45 strike call option:
$4
45 strike put option: $4
50 strike call option:
$2
50 strike put option: $9
55 strike call option:
$1
55 strike put option: $15
You believe that XYZ will be extremely volatile in the next...

A stock is currently priced at $130. The following options, with
expiration in 4 months, are available:
K
c
p
120
12.80
1.85
125
8.65
3.11
130
5.05
4.85
135
2.61
7.55
140
1.10
11
Use call options with strike prices of 130 and 135 to create a
bull spread. What is the breakeven stock price (in 4 months)?

Which one of the following options is out-of-the-money?
call with a $20 strike and a stock price of $21
put with a $35 strike and a stock price of $33
call with a $45 strike and stock price of $46
put with a $75 strike and a stock price of $70
call with a $50 strike and a stock price of $49

Portfolio of options on shares of a non-dividend paying stock.
The portfolio consists of:
Long call with a strike price of 50
Short call with a strike price of 55
Long put with a strike price of 55
Short put with a strike price of 50
All options expire in 2 months.The current price of one share of
stock is 48.00. The risk-free interest rate is 3%.
1. Determine the cost of the portfolio?
2. Determine the maximum and minimum...

The prices of European call and put options on a
non-dividend-paying stock with 12 months to maturity, a strike
price of $120, and an expiration date in 12 months are $25 and $5,
respectively. The current stock price is $135. What is the implied
risk-free rate?
Draw a diagram showing the variation of an investor’s profit and
loss with the terminal stock price for a portfolio consisting
of
One share and a short position in one call option
Two shares...

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