A SPREAD is an investment strategy that involves the simultaneously buying and selling equal number of options on the same underlying security but with different strike prices.

Consider the following spread created by call options with the same expiration date on the same stock:

A SHORT position in a call option with a premium of $5 and a strike price of $50.

A LONG position in a call option with a premium of $2 and a strike price of $60.

a) Draw the profit/loss graph for this strategy (be sure to draw BOTH the short call and the long call positions) Fin 330 Fall 2015

b) What is the payoff of this spread at expiration if the stock price of the underlying stock is $40?

c) What is the payoff of this spread at expiration if the stock price of the underlying stock is $65?