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1. Bill believes that the price of LMN stock will rise, so he buys an LMN 20 call and simultaneously sells an LMN 22 call.
1. Bill believes that the price of LMN stock will rise, so he buys an LMN 20 call and simultaneously sells an LMN 22 call. The 20 call has a price of $1.50 and the 22 call has a price of $0.70. He does not own the stock itself.
a. Is this an example of a bull spread? Explain.
b. What is the purpose of selling the LMN 22 call?
c. Complete the following table to show the profit of the bull spread at different LMN prices.
LMN Price at Expiration | Purchased 20 Call Payoff | Written 22 Call Payoff | Net Cost of Options | Total Profit |
$19 | ||||
$20 | ||||
$21 | ||||
$22 | ||||
$23 | ||||
$24 |
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