Financial options An option trader considers the following strategy concerning t

Question

Financial options

An option trader considers the following strategy concerning the stock XYZ. The stock currently trades at $32. Option trader buys a call option with strike 30, pays premium of $3 per share, writes a call at strike 35, and collects $1 dollar. Please construct a figure that depicts the profit at expiration with different prices of the underlying stock XYZ. Could you also discuss, what are the expectations of the trader about the future price of the stock if this strategy is implemented?

Explanation / Answer

The person gains in case of bull spread when the Prise rise in the market
Hence in the given case Prise at $35,40 gains

In this strategy involved in transactions is Spread strategy because of both the transactions for Calls
Call options:
Strike price =30=Low prise (Holder)
Strike price=35=High price(writer)
In this One trnsaction as a writer at high strike price(35) and one transaction at holder at low strike price(30). so the strategy is Bull Spread strategy. Calculation of net payoff for Bull Spread with calls Call Holder Strike price Actual price Action by Call Holder Value to Call Holder Premium Pay off 30 25 Lapse 0 3 -3 30 30 Lapse 0 3 -3 30 35 Excersize 5 3 2 30 40 Excersize 10 3 7 Call writer Strike price
$ Actual price($) Action by Call Holder Value to Call Writer Premium
$ Pay off
$ Net Pay off($) 35 25 Lapse 0 1 1 -2 35 30 Lapse 0 1 1 -2 35 35 Lapse 0 1 1 3 35 40 Excersize -5 1 -4 3

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