Consider the following option portfolio whose components have the same maturity:

• A long call option with a strike of $25 and a premium of $5

• A short call option with a strike of $30 and a premium of $3

1. [2] What is the name of this option strategy?

2. [3] Why would you use such a strategy?

3. [10] Draw the profit graph of this portfolio at expiration as a function of the spot price of

   the underlying asset (label as much as you can to ensure the diagram is to scale)

4. [5] Considering only the total profit, identify when this strategy does better and when it

   does worse than simply buying the underlying asset