question archive In this exercise we are interested in studying a strategy called "bear spread
In this exercise we are interested in studying a strategy called "bear spread
Subject:BusinessPrice: Bought3
In this exercise we are interested in studying a strategy called "bear spread." It consists in combining the sale of a call and the purchase of a call with two different strike prices. All options are on the same commodity and have the same expiry date T.
1. Please draw the terminal payoff (payoff on expiry date) to this particular option strategy (be very precise). What is the maximum profit and loss on this bear spread? Assume:
Call premium = $5 at X2 = 30 at time of spread purchase
Call premium = $3 at X1 = 35 at time of spread purchase
2. Now create the same kind of strategy using put options with different strike prices and premium
(a) What option position in a put (long or short) is required at strike price X2? How many options? Draw.
(b) What option position in put (long or short) is required at strike price X1? How many options? Draw and then combine drawing with 2.a
(c) What is the net cost to create the strategy with puts?
3. What would be a "natural" name for the strategy that uses puts? Explain why.
