You are cautiously bullish on the common share of the Wildwood Corporation over the next several months. The current price of the share is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be ________.
A)$1 050
B)$650
C)$400
D)$400 income rather than cost

Question

You are cautiously bullish on the common share of the Wildwood Corporation over the next several months. The current price of the share is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes:  Ignoring commissions, the cost to establish the bull money spread with calls would be ________.
A)$1 050 
B)$650 
C)$400 
D)$400 income rather than cost

Quizplus · Accepted Answer

To establish a bull money spread with calls, we need to buy a lower strike call option and sell a higher strike call option. 
The cost of the lower strike call option (50 strike) is $6.50, and we would buy 5 options for a total cost of 5*$6.50 = $32.50. 
The premium received from selling the higher strike call option (60 strike) is $2.50, and we would sell 5 options for a total premium of 5*$2.50 = $12.50. 
The net cost to establish the spread would be the difference between the cost of the lower strike call option and the premium received from selling the higher strike call option, which is $32.50 - $12.50 = $20. 
Since we are buying 5 options and each contract represents 100 shares, the total cost of the spread would be 5*$20*100 = $10,000. 
Therefore, the correct answer is B) $650.

You Are Cautiously Bullish on the Common Share of the Wildwood