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Answer: Long the call with strike of 28.00 plus Short the call with strike of 32.00; or Long the put with strike of 28.00 plus Short the put with strike of 32.00
A **bull spread** is a strategy that benefits from an increase in the underlying asset price. Two standard constructions are: - **Bull call spread:** buy the lower-strike call and sell the higher-strike call. - **Bull put spread:** buy the lower-strike put and sell the higher-strike put? Actually, the bullish put spread is constructed as **short the higher-strike put and long the lower-strike put**; equivalently, the positions are arranged so the net payoff rises when the stock rises. With strikes **28** and **32**: - **Long call K = 28, short call K = 32** is a bull call spread. - **Long put K = 28, short put K = 32** is the corresponding put spread structure listed in the answer choices. Therefore, the correct choice is **C**.
Author: Manit Arora
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Q-727.1. Assume the current price of a stock is $30.00 and imagine that we can only trade the following four options at two strike prices:
$28.00, we can employ either a call or a put, where c(K=28.00) = $3.98 and p(K=28.00) = $1.46$32.00, we can employ either a call or a put, where c(K=32.00) = $2.05 and p(K=32.00) = $3.46Each of these prices is approximately accurate for a six-month option when the volatility is 31.2% (but these details are not necessary to answering the question). If we want to implement a bull spread, how could we do that?
A
We cannot create a bull spread with these options
B
Long the call with strike of 32.00 plus Short the put with strike of 28.00
C
Long the call with strike of 28.00 plus Short the call with strike of 32.00; or Long the put with strike of 28.00 plus Short the put with strike of 32.00
D
Long the call with strike of 32.00 plus Short the call with strike of 28.00; or Short the put with strike of 28.00 plus Long the put with strike of 32.00
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