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:

To establish a bull money spread with calls, you would ________.

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:

To establish a bull money spread with calls, you would ________.

Quizplus · Accepted Answer

To establish a bullish money spread, we want to buy a call option with a lower strike price and sell a call option with a higher strike price. This will limit the cost of our option position while still allowing us to profit if the stock price increases. Therefore, we should buy the 45 call with a premium of $8 and sell the 55 call with a premium of $1. This creates a net debit of $7, which is the maximum potential loss. The maximum potential profit is the difference between the strike prices minus the net debit, which is $3 ($55 - $45 - $7). Overall, this strategy limits our risk while still allowing us to profit if the stock price increases.

You Are Cautiously Bullish on the Common Stock of the Wildwood