Q1. Bluehound Inc. is currently trading at $55 a share. You want to establish a

Question

Q1. Bluehound Inc. is currently trading at $55 a share. You want to establish a bullish spread strategy on this firm using calls, and you find the following option quotes: Expiration Strike June June June 56.00 61.00 66.00 Call 9.60 5.05 2.55 Put 3.10 4.10 8.60 What is the total cost of establishing the bullish spread using the first two options? In June, if the stock price turns out to be $59, what is your profit on this position? Answer: Initial outlay $455 At maturity, payoff= $300 Loss =-$155

Explanation / Answer

100 calls each-We will buy 56 strike call and sell strike 61 call
Net outlay=100*9.60-100*5.05=455
If stock is 59 at expiry, we will get 3 on 56 strike call and 0 on 61 strike call
So, total for 100 calls, payoff=3*100=300
Profit/Loss=300-455=-155

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