You write a call option with X = 50 and buy a call with X = 60.
Question:
You write a call option with X = 50 and buy a call with X = 60. The options are on the same stock and have the same expiration date. One of the calls sells for $3; the other sells for $9.
a. Draw the payoff graph for this strategy at the option expiration date.
b. Draw the profit graph for this strategy.
c. What is the break-even point for this strategy? Is the investor bullish or bearish on the stock?
Step by Step Answer:
a b This strategy is a bear spread Initial proceeds 9 3 6 The payoff is either neg...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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