Question

A trader creates a bear spread by selling a 6-month put option with a $$\$ 25$$ strike price for $$\$ 2.15$$ and buying a 6-month put option with a $$\$ 29$$ strike price for $$\$ 4.75$$. What is the initial investment? What is the total payoff (excluding the initial investment) when the stock price in 6 months is (a) $$\$ 23$$, (b) $$\$ 28$$, and (c) $$\$ 33$$.

   A trader creates a bear spread by selling a 6-month put option with a $$\$ 25$$ strike price for $$\$ 2.15$$ and buying a 6-month put option with a $$\$ 29$$ strike price for $$\$ 4.75$$. What is the initial investment? What is the total payoff (excluding the initial investment) when the stock price in 6 months is (a) $$\$ 23$$, (b) $$\$ 28$$, and (c) $$\$ 33$$.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 12, Problem 21

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Step 1

To calculate the initial investment, we need to find the cost of buying the put option with a $29 strike price and subtract the cost of selling the put option with a $25 strike price. Cost of buying put option with $29 strike price = $4.75 Cost of selling put Show more…

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A trader creates a bear spread by selling a 6-month put option with a $$\$ 25$$ strike price for $$\$ 2.15$$ and buying a 6-month put option with a $$\$ 29$$ strike price for $$\$ 4.75$$. What is the initial investment? What is the total payoff (excluding the initial investment) when the stock price in 6 months is (a) $$\$ 23$$, (b) $$\$ 28$$, and (c) $$\$ 33$$.

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