Drewfus Corp.is currently trading at $30.Call options with a strike price of $25 and 6 months to expiration are trading at $7 and call options with a strike price of $35 and 6 months to expiration are trading at $2.If Investor Andy Reutter buys a $25 call and simultaneously sells a $35 call what is his maximum gain on the position.

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Quizplus · Accepted Answer

The initial cost of this strategy is $5,because Reutter will pay $7 for the for the $25 call and receive $2 from the $35 call.If the stock of Drewfus rises to $35,Reutter will experience his maximum gain of $5.This can be calculated by subtracting the difference between the two strike prices and subtracting out the initial cost of the strategy (($35 - $25)- $5).This equals $5.This type of strategy is called a bull call spread.A good rule of thumb for spreads to find out which way the investor wants the stock to move is,if an investor buys the lower strike priced option then he is bullish.If he sells the lower strike priced option then he is bearish.This rule works for both call and put spreads.