You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock 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:
-If in June the stock price is $53 your net profit on the bull money spread would be ________.
A) $300
B) -$400
C) $150
D) $50

Question

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock 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: 
-If in June the stock price is $53 your net profit on the bull money spread would be ________.
A) $300 
B) -$400 
C) $150 
D) $50

Quizplus · Accepted Answer

To establish a bullish money spread, the investor should buy a call option with a lower exercise price and sell a call option with a higher exercise price. In this case, the investor can buy the June 50 call for $4.50 and sell the June 55 call for $1. The cost of the spread is $3.50 ($4.50 - $1), which is the maximum potential loss. If the stock price is $53 in June, the June 50 call option will be worth $3 ($53 - $50) and the June 55 call option will be worthless. The net profit would be $0.50 ($3 - $2.50 spread cost) per share. Since each option contract represents 100 shares, the net profit would be $50 ($0.50 x 100). Therefore, the correct answer is C.

You Are Cautiously Bullish on the Common Stock of the Wildwood