Question
You decide to create a bull spread on a stock, anticipating the stock price will increase. You sell a 6-month call option for $2.83/share with
You decide to create a bull spread on a stock, anticipating the stock price will increase. You sell a 6-month call option for $2.83/share with a strike price of $45.00, and you buy a call option for $5.11/share with a strike price of $40.00. The current spot price is $42.00, and assume an interest rate of 3% per annum. a. What is the initial cost per share of entering this position? b. Draw a profit diagram of this position. Clearly indicate all breakeven points, intercepts, and the heights of all lines where applicable (biggest loss, biggest gain). c. Indicate your payoff and profit given the following final stock prices: Payoff Profit St = $38.75 St = $41.50 St = $50.42
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