An investor is speculating on Company AA shares. The shares are currently trading at R135 per share. The investor believes that Company AAs shares will experience a bearish run and she wants to use call options to take advantage of this. She finds that a call option on Company AAs shares with an exercise price of R115 is selling at a premium of R300. She decides to buy the call option and simultaneously writes another call option on Company AAs shares with an exercise price of R100 at a premium of R500. One call option is made up of 100 shares.

5.1 Identify the option strategy used by the investor.

5.2 What is the initial net gain/(cost) on the position?

5.3 What is the maximum loss on the position?

(2) 5.4 What is the maximum profit on the position?

5.5 What is the breakeven share price for the position?

5.6 What should the investor do to retain the same profile of the option strategy in scenario, but now using put options?