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Question : Common stock of a company is selling today for $53.69. Call options on the company expiring in 1-month with strike prices of $49 and $56 are selling for $4.80 and $0.36, respectively.
a. How would you form (i.e., which option would you be long and which option would you be short) a bull call spread with the two options? What is the cost of each spread?
b. If you have $890 on hand, how many spread contracts (each contract=100 options) can you buy? Remember that you cannot buy fractional contracts. Show calculations. (Hint: Divide the amount of money available by cost of each contract).
c. Fill out the following table for amount of profit for a single bull call spread created using the two options described above. Clearly show profit of the two options used in forming the strategy.
d. What is the maximum and minimum profit for a bull call spread created using the two calls described above?
e. Draw profit diagram for a single bull call spread created using the two calls described above. Use a ruler to draw the lines if you are drawing by hand. Make sure the scale of your picture makes sense. Clearly label each axis and indicate which line is what. (feel free to do this part in Excel and attach the printout)
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