When does this call spread make money?
Quantitative Finance
Level
1
An investor bought the $50 call for $4, and sold the $53 call for $2. What is the minimum price of the stock on expiration, in order for the investor to have not lost money on this trade?
Assume that no other trades were made. Ignore transaction costs and interest rates.
$52
$55
$50
$51
$53
$54
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1 solution
It is a bull call spread strategy. The strategy has a cost of $ 4 − $ 2 = $ 2 , which is the maximum loss if underlying price on expiration P ≤ $ 5 0 . When P > $ 5 0 the income is I = P − $ 5 0 until it is capped when P = $ 5 3 where income exceeding $ 5 3 from $ 5 0 call is paid out to the $ 5 3 call sold, therefore the maximum profit is $ 1 . It can be seen the the breakeven point is when P = $ 5 2 .