3 Option markets You are trying to put together a bull spread where you buy a call with strike $25 and short a call with strike $30. You have decided that the most you are willing to pay for the position is $1.50. You look into the limit order books for both options and see the following quotes in the market: Option Call, strike $25 Call, strike $30 Bid $2 $1 Ask $3 $2 Assume that the quantities trading in the options are sufficiently large to fill your order. 1. Suppose that you shorted the call with strike $30 using a market order, what would you be willing to buy the call with strike $25 for? 2. Suppose that you bought the call with strike $25 using a market order, what would you be willing to sell the call with strike $30 for? 3. If you place these two limit orders in the market, what will the limit order book look like? Hint: the Bid and Ask will change if your limit orders are more competitive than the rest of the market. 4. Assume that no market orders arrive, but a new sell limit order arrives, so that the the ask price on the call with strike $25 falls to $2.75. How will you change your limit orders? What will the limit order book look like now? This question is interesting because in many derivatives markets using the "Globus package, this generation of "implied orders" is automated. Hence the market will be filled with implied orders generated by traders trying to do combination trades such as this one). Conversely, the limit order books for combination trades will be filled with implied orders inferred from the underlying derivative books