Explanation:
A bull call spread is constructed by buying the lower-strike call and selling the higher-strike call.
$22 call: cost = $2.00$26 call: premium received = $0.95$2.00 - $0.95 = $1.05Maximum payoff occurs when the stock price is at or above the higher strike:
$26 - $22 = $4.00So, maximum profit = maximum payoff - initial cost:
$4.00 - $1.05 = $2.95ROI = maximum profit / initial cost:
$2.95 / $1.05 = 2.8095 ≈ 281%Therefore, the correct answer is C.
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Q-184.1. The price of a stock is currently $20.00. An OTM call option on the stock has a strike at $22.00 and costs $2.00. An OTM call option with a strike of $26.00 costs $0.95. If an investor uses both of these options to enter a BULL SPREAD trade, what is the trade’s maximum return on investment (ROI) where ROI = maximum profit / initial cost, without regard to time value of money?
A
85%
B
187%
C
281%
D
364%