Question

Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. You plan to create a bull spread call (Buying a call spread) by trading a total of 200 options?

Answer 1

Answer:

A bull spread is created when you buy at a low strike price call and sell at a high strike price call.

In this case, you would need to buy a call option with a strike price of $35 and sell a call option with a strike price of $40. The cost of the transaction would be = purchase price - selling price = ($6 x 100) - ($4 x 100) = $600 - $400 = $200

If the strike price is equal or higher than $40, you will be able to earn $500, which is the difference between the low strike price and the high strike price times 100 stocks.

So your maximum gain can be = maximum revenue - cost = $500 - $200 = $300