Question 4 (10 Marks Total) (A) (5 Marks) A spread trading strategy involves taking a position in two or more options of the same type. One of the most popular types of spreads is a bull spread. This can be created by buying a call option on a stock with certain strike price and selling a call option on the same stock with a higher strike price. Both options have the same expiration date. Suppose currently Rivian stock is priced at $50. You just created a bull spread trading strategy by long a call at $48 and short a call at $52. The prices for the $48 call option and $52 call option are $3 and $1 respectively. Please draw payoff diagrams to show the payoffs (profits) from two call options and your bull spread trading strategy. (B) (5 Marks) A butterfly spread involves positions with three different strike prices. It can be created by buying a call option with a relatively low strike price, buying a call with a relatively high strike price, and selling two call options with a strike price that is halfway between the strike prices of the first two call options, Suppose now you just created a butterfly spread by buying a call option on Kingston technology with strike price $45 and another call option with strike price at $55, selling two call options with strike price $50. They all have the same expiration date. The prices for the $45, $50, and $55 call option are $9, $4 and $1 respectively. Please draw a payoff diagram to show the payoff of your butterfly spread trading strategy. Question 4 (10 Marks Total) (A) (5 Marks) A spread trading strategy involves taking a position in two or more options of the same type. One of the most popular types of spreads is a bull spread. This can be created by buying a call option on a stock with certain strike price and selling a call option on the same stock with a higher strike price. Both options have the same expiration date. Suppose currently Rivian stock is priced at $50. You just created a bull spread trading strategy by long a call at $48 and short a call at $52. The prices for the $48 call option and $52 call option are $3 and $1 respectively. Please draw payoff diagrams to show the payoffs (profits) from two call options and your bull spread trading strategy. (B) (5 Marks) A butterfly spread involves positions with three different strike prices. It can be created by buying a call option with a relatively low strike price, buying a call with a relatively high strike price, and selling two call options with a strike price that is halfway between the strike prices of the first two call options, Suppose now you just created a butterfly spread by buying a call option on Kingston technology with strike price $45 and another call option with strike price at $55, selling two call options with strike price $50. They all have the same expiration date. The prices for the $45, $50, and $55 call option are $9, $4 and $1 respectively. Please draw a payoff diagram to show the payoff of your butterfly spread trading strategy
