Question
You are considering two call options on an underlying asset with the same expiry period. The first call has an exercise price of 100 and
You are considering two call options on an underlying asset with the same expiry period. The first call has an exercise price of 100 and sells for 9. The 2nd call has an exercise price of 110 and sells for 5. Your strategy is buying the first call and selling the 2nd call. (i) Show and explain the payoffs and profits diagrams. (ii) What is the maximum profit/loss when the price of the underlying at expiry is either 80 or 120? Explain. (iii) Explain the market outlook of the strategy and discuss the impact of time erosion of the strategy on the positions.
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