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### Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

# You write a call option with X = $50 and buy a call with X =$60. The options are on the same stock and have the same expiration date. One of the calls sells for $3; the other sells for$9.a. Draw the payoff graph for this strategy at the option expiration date.b. Draw the profit graph for this strategy.c. What is the break-even point for this strategy? Is the investor bullish or bearish on the stock?

Answer

a & b. As below

c. $56; bearish. See the step by step solution ### Step by Step Solution ## Step 1: Drawing a payoff graph with given information “a, b”  Position ST < 50 50 < ST < 60 ST > 60 Long call (X=60) 0 0 ST - 60 Short call (X=50) 0 -(ST – 50) -(ST – 50) Total 0 -(ST – 50) -10 From the above, it’s clear that the payoff is either zero or negative. ## Step 2: Explanation on “break even” and investor’s bullish/bearish ‘c’ The proceeds =$9 - $3 =$6

Breakeven would happen when the payoff even out the proceeds of $6. This happens at stock price of ST =$56.

The investor is bearish as he entered into bear spread.

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