A bull spread, or split strike conversion, strategy has the following components:.

Buy a security at price S. Buy one share of the stock.

Buy an out of the money (OTM) put option at strike price K1 where K1 < S.

Sell an OTM call option at strike price K2 where K2 > S.

Invest the difference between the call and put premiums at the risk free rate.

Assume that a stock has price S=$20

You will invest your whole portfolio in the stock. Assume that you can buy a partial share of the stock if needed.The new 10% OTM put option has a total cost (premium) of $1.05 and the new 10% OTM call option has a total cost (premium) of $1.20. Both options expire in 1 month. The risk free rate is 6% annually.(I am intentionally not giving you the strike prices for the call and put here; you will need to calculate them based on your total investment in the stock).Assume that the put and call premiums are for the whole option position, which includes a partial share in the stock.

e. Describe the cash flows at the end of month 1/beginning of month 2.

f. Assume that the stock earns 12% in the second month. What is your portfolio worth?

g. What is your rate of return at the end of the second month, relative to the portfolio's value at the end of the first month? (do not round)

h. What would your rate of return had been if you just bought the stock and did not engage in the option trades?