USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 16.8. If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?
A) $912.50 loss
B) $87.50 gain
C) $87.50 loss
D) $1,000.00 gain
E) $1,000.00 loss

Question

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
 
-Refer to Exhibit 16.8. If XYZ were trading at $90/share and you formed a bull money spread, what is your profit if XYZ is trading at $110 at expiration?
A) $912.50 loss 
B) $87.50 gain 
C) $87.50 loss 
D) $1,000.00 gain 
E) $1,000.00 loss

Quizplus · Accepted Answer

A bull money spread involves buying and selling options with different strike prices but the same expiration date. If XYZ is trading at $110 at expiration, the call option with the lower strike price (bought option) will be in the money and worth the difference between the stock price ($110) and the strike price of the bought option. The call option with the higher strike price (sold option) will also be in the money, but its cost will reduce the overall profit. The specific numbers needed to calculate the exact profit are not provided, but among the given options, the one that represents a gain and not a loss, considering the strategy's nature, is a $87.50 gain.