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:

Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is ________.

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:

Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is ________.

Quizplus · Accepted Answer

To establish a bull money spread with puts, you would buy the 45 put at a cost of $2 and write the 55 put, earning the $7.50 premium. The initial revenue is ($7.50 − $2)(100) = $550. S_T = $52 at contract maturity in June Profit = P45, June − P55, June + Initial revenue Profit = [Max (0, $45 − $52) − Max (0, $55 − $52)](100) + $550 = $250.

You Are Cautiously Bullish on the Common Stock of the Wildwood