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?
Higher Strike call have less premium
therefore 400 Strike call will have premium of 30
and 450 strike call will have premium of 10
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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