Question 1

For this question, you are supposed to create a spreadsheet to learn about the money spread using

calls or puts. Create four sheets, one for Bullish spread with calls, Bearish spread with Calls,

Bullish spread with Puts and, Bearish spread with Puts.

Money Spread

A money spread is also known as a vertical or price spread. It refers to a portfolio that contains

the same type of option with the same expiration date but different exercise prices. One can form

a money spread by using either call options or put options.

A money spread has two forms, bullish and bearish, depending on the expectation about the

stock price movement. If an investor is bullish about the stock and expects the stock price to go

higher than the low exercise price but remain lower than the higher exercise price, they will write

a call with the higher exercise price and buy a call with the lower exercise price. On the other

hand, if the investor is bearish about the share price and expects the share price to decrease, they

will write a call with the lower exercise price and buy a call with the higher exercise price. Since

the call option with the lower exercise price will be priced higher than the call option with the

higher exercise price, this strategy would provide an immediate cash flow to the investor.

Money Spread using Calls

Assume that the Amazon.com share price on January 1 is $ 725 and call options and put options

are available with maturity in March. Option series A has an exercise price of $740 (SL), while

series B has an exercise price of $760 (SH) for both calls and puts. The price of a call option with

an exercise price of $740 is $35 (CL), and the price of a call option with an exercise price of $760

is $20 (CH). The put prices are $48 (PL) and $60 (PH) for options with exercise prices of $740

and $760, respectively.

Note: L represents the low, and H represents the high. CL and CH are the premiums on the calls,

and PL and PH are the premiums on the puts.

Change the stock prices at expiration by $5 from $600, to $880. Then determine the payoffs on

the following strategies. You are supposed to create a spreadsheet to map the payoffs in relation

the stock prices at expiration.

1. Bullish spread using Calls. In a bullish money spread, one will write a call with the

higher exercise price and buy a call with the lower exercise price.

2. Bearish spread using Calls. In a bearish money spread, one would buy a call with the

higher exercise price and write a call with the lower exercise price.