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Consider a pair of call options on the same stock with the same expiration date...

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Finance

Consider a pair of call options on the same stock with the same expiration date but different strike prices. While the call option with a $50 strike price is currently priced at $2.50, the one with a $45 strike price is currently trading at a price of $8.00. The current stock price is $50 per share. A trader is evaluating a trading strategy involving the following option positions:

  • Short 2 call option with strike price $50

  • Long 3 call options with strike price $45

a)

Draw a diagram/graph illustrating the profit/loss of the trading strategy. Make sure you scale and label all the lines and points properly so that gains and losses are clearly illustrated.

b)

For what range of stock prices would the trader end up with a profit at maturity if the strategy is executed?

c)

Discuss the main characteristics of this strategy. When is it appropriate to use such a strategy?

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