Question

You write a call with a strike of $400 and buy a call with a strike...

You write a call with a strike of $400 and buy a call with a strike of $450 on Nordstrom stock. One of the calls sells for $30 and the other sells for $10.

Draw and label the payoff graph for this strategy.

Draw and label the profit graph for this strategy.

What is the premium on the call with a strike of $400?

What is the premium on the call with a strike of $450?

What is the breakeven price per share for this strategy?

How much would the investor total profit or loss if Nordstrom's stock price is $380 at expiration?  

What strategy is the investor employing?  

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Homework Answers

Answer #1

Higher Strike call have less premium

therefore 400 Strike call will have premium of 30

and 450 strike call will have premium of 10

Breakeven

Premium collected from 400 call = 30

premium paid on 450 call = 10

Net premium earned = 20

Breakeven = 400 + Ner premium earned

Breakeven = 400 + 20 = 420  

If the price is 380 on expiration

payoff from 400 call = 0

payoff from 450 call = 0

Ner premium earned = 20

Therefore Profit = 20

Thsi strategy is called BEAR CALL SPREAD in which we sell/write lower strike call option and buy higher strike call option

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