In mid-May, there are two outstanding call option contracts available on the stock of ARB Co.:

Call #	Exercise Price		Expiration Date		Market Price
1	$50		August 19		$8.20
2	60		August 19		3.28

 

A: Assuming that you form a portfolio consisting of one Call #1 held long and two Calls #2 held short, complete the following table showing your intermediate steps. In calculating net profit, be sure to include the net initial cost of the options. Do not round intermediate calculations. Round your answers to the nearest cent. Use a minus sign to enter negative values, if any. If the answer is zero, enter "0".

Price of ABC Stock at Expiration ($)	Profit on Call #1 Position		Profit on Call #2 Position		Net Profit on Total Position
40	$		$		$
45	$		$		$
50	$		$		$
55	$		$		$
60	$		$		$
65	$		$		$
70	$		$		$
75	$		$		$

 

B: What are the breakeven stock prices? What is the point of maximum profit? Do not round intermediate calculations. Round your answers to the nearest cent.

The first breakeven point: $

The second breakeven point: $

The point of maximum profit: $

C: Under what market conditions will this strategy (which is known as a call ratio spread) generally make sense? Does the holder of this position have limited or unlimited liability?

Answer rating: 100% (QA)

Part a Please consult the table below for more information Please look at the third row to get a bet... View the full answer