Question

You consider a bullish spread option strategy by purchasing a call option with a $25 exercise price priced at $4 and by writing a call option with a $40 exercise price priced at $2.50. If the price of the stock increases to $50 at expiration and each option is exercised on the expiration date, what is the net profit per share at expiration (ignoring transaction costs)

Answer 1

Answer:

The net profit is $13.50

Explanation:

The following data is  use for computation

-Exercise price of a call option Xl  is $25

-Price of a call option with lower exercise price Cl is $4

-Exercise size of a call option Xh is $40

-Price of a call option with lower exercise price Ch is $2.5

-Price of stock at expiration Sr is $50

Each point is exercise on the date of expiration

Transaction cost is Nil

Considering bullish spread strategy, the equation for net profit per share at expiration is as follows:

Net Profit = Xh - Xl + Ch - Cl

Net Profit = $40 - $25 + $2.5 - $4

Net Profit = $13.50

Thus, the net profit per share at expiration is $13.50