Explanation:
A strategy involving buying a call option with a lower strike price and simultaneously selling a call option with a higher strike price is known as a bull call spread.
The payoff of the strategy at expiration (ignoring the initial cost/premium) is the sum of the payoffs of the long and short positions: Where:
Substitute the values:
The payoff of the bull call spread is USD 5.39.
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Q.32 A trader applied a strategy where he purchased a European call option on the stock of KKL with a strike price of USD 29.50, and at the same time, sold a European call option on the same stock with a strike price of USD 34.89. Suppose that the final price of the stocks at expiration is USD 44, what are the name and the payoff of the strategy? Ignore the cost of the strategy.
A
Name of the strategy: Bear call spread; Payoff: USD -9.11
B
Name of the strategy: Bull call spread; Payoff: USD 9.11
C
Name of the strategy: Bear call spread; Payoff: USD -5.39
D
Name of the strategy: Bull call spread; Payoff: USD 5.39