Explanation:
In a bull spread strategy, an investor buys European call options with a specific strike price (USD 29.50) and simultaneously sells European call options with a higher strike price (USD 34.89).
If the current price (USD 44) is higher than the strike price of the short call option (USD 32), both call options will be exercised, and the payoff of the investor will be X2-X1 or USD 34.89-USD 29.50 = 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
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