Suppose you buy a call with strike price K1 and sell a call on the

same stock with the same expiration date but with a strike price of

K2, where K2 > K1.

1. Write an expression for the payoff of this options portfolio and

draw the payoff diagram (ignoring the premiums on the two op-

tions).

2. Buying the call with strike K1 involves an initial cash outflow, a

negative cash flow. Selling the call with strike K2 involves an initial

cash inflow, a positive cash flow. Do you expect the net initial cash

flow from the setup of the portfolio of two options to be positive

or negative? Why?