1. You are bullish about an underlying that is currently trading at a price of $80. You...
Question:
1. You are bullish about an underlying that is currently trading at a price of $80. You choose to go long one call option on the underlying with an exercise price of $75 and selling at
$10, and go short one call option on the underlying with an exercise price of $85 and selling at $2. Both the calls expire in three months.
A. What is the term commonly used for the position that you have taken?
B. Determine the value at expiration and the profit for your strategy under the following outcomes:
i. The price of the underlying at expiration is $89.
ii. The price of the underlying at expiration is $78.
iii. The price of the underlying at expiration is $70.
C. Determine the following:
i. the maximum profit.
ii. the maximum loss.
D. Determine the breakeven underlying price at expiration of the call options.
E. Verify that your answer to Part D above is correct.
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