Explanation:
In a bull spread strategy, an investor buys European call options with a specific strike price ($89) and simultaneously sells European call options with a higher strike price ($92). If the current price ($97) is higher than the strike price of the short call option ($92), both call options will be exercised, and the payoff of the investor will be X2-X1 or $92-$89 = $3.
Q.768 An investment manager at Skyline Bank frequently invests in stocks and derivatives. He is always testing different options strategies to maximize the value of the assets under management. Recently, he applied a bull spread strategy on Ocean Shipping Co. stock options. The manager applied a strategy by purchasing European call options on the stock of the firm with a strike price of $89, and at the same time, he sold European call options on the same stocks with a strike price of $92. Suppose that the final price of the stocks at expiration is $97, then estimate the payoff of the strategy. Ignore the cost of the strategy.
A
$8
B
$5
C
$3
D
-$2
No comments yet.