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What is a bullish vertical spread

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The next two questions are based on the following data for a fictitiously named company, OOPS. Current stock price S is $17.5. Time to maturity T is six months. Continuously compounded, risk-free interest rate r is 4.5percent per year.

European Options Prices are given: Call Price: Put Price:
K1 = $15 $5 $0.05
K2 = $16 $2.5 $0.6
K3 = $18 $1.5 $1.5
K4 = $20 $0.6 $2.50

a. What is a bullish vertical spread? Draw a bullish vertical spread by trading put options with strike prices K2=$16and K4= $20.(10')

b. What is the aim of a long (or bottom) straddle strategy? Create a long straddle by buying a call and a put with strike price K3= $18.(10')

Reference no: EM132999563

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