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Consider the following spread strategy on Southwest Airlines (LUV): Short LUV Feb $35 call, price...

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Finance

Consider the following spread strategy on Southwest Airlines (LUV): Short LUV Feb $35 call, price = $1.75, long LUV May $35 call, price = $2.25

  1. What type of spread strategy is this?
  2. In February at expiration of the short call, UAL is currently trading at $40 and the May $35 call is trading at $6.75. We close our spread position in two ways: settle on the Feb $35 call and take an offsetting position on the May $35 call. (This is called lifting the leg).
  3. Evaluate the payoff on the spread assuming 100 share contracts if the conditions in (b) hold.
  4. Draw a general payoff profile of this type of spread.

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