Explanation:
Bull call spread, maximum profit is $3, maximum loss is $2.
In a bull call spread, the buyer of the spread purchases a call option with a low exercise price, , and subsidizes the purchase price of the call by selling a call with a high exercise price, .
The maximum profit will occur at any stock price over the high exercise price. For example, at a stock price of $50: Maximum profit: $10 - 5 - 5 + 3 = `.
The maximum loss will occur at any stock price below the low exercise price. For example, at a stock price of $35: Maximum loss: $0 - 0 - 5 + 3 = -`.
(Book 3, Module 40.2, LO 40.c)
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Question 5
An asset manager sells a March 2025 call on XYZ stock with an exercise price of $45 for a $3 premium. He also buys a March 2025 call on the same stock with an exercise price of $40 for a $5 premium. Identify this option strategy and the maximum profit and loss for the manager.
A
Bear call spread, maximum profit is $3, maximum loss is $2.
B
Bull call spread, maximum profit is $3, maximum loss is unlimited.
C
Bear call spread, maximum profit is unlimited, maximum loss is $2.
D
Bull call spread, maximum profit is $3, maximum loss is $2.
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