Question

4. a) Build a bear call spread with the following strike prices: $195 and $180. Mark the maximum profit, maximum loss, the break-even point(s) and the slopes. b) Build a bear put spread with the same strike prices as above. Mark the maximum profit(s), maximum loss(es), the break-even point(s) and the slopes. c) Which of the bear spreads is a better investment? why? (12 words max) d) What are you exactly speculating on when you invest in this bear spread? (12 words max)   

Answer 1

a)	Bear CALL Spread
	Strategy:
	1. SELL CALL at Strike price $180
	2.Buy CALL at strike price $195
	Buying CALL gives you the right but no obligation to Buy stock at $195
	By Selling CALL you have the obligation to Sell stock at $180
	Hence , if the stock price goes above $195, you make profit; because ,you can buy at 195 and sell at market price
	But , if the stock price goes above $180, you make Loss .You have the obligation to SELL at Lower rate of $180
	Assume that Price at expiration =S
	1.SELL CALL at Strike price $180
	Payoff =Min.((180-S),0)
	2.BUY CALL at strike price $195
	Payoff =Max.((S-195),0)
		S	A	B	C=A+B
		Price at Expiration	Payoff from SELL CALL@180	Payoff from BUY CALL@195	Net Payoff
		$165	$0	$0	$0
		$170	$0	$0	$0
		$175	$0	$0	$0
		$180	$0	$0	$0
		$185	($5)	$0	($5)
		$190	($10)	$0	($10)
		$195	($15)	$0	($15)
		$200	($20)	$5	($15)
		$205	($25)	$10	($15)
		$210	($30)	$15	($15)
		$215	($35)	$20	($15)
	There will be Zero Payoff when S< or =$180
	Breakeven =S=$180
	Maximum Profit =0	Profit is actually made fromNet premium received
	Maximum Loss=$15
b)	Bear PUT Spread
	Strategy:
	1. Buy Put at Strike price $195
	2.Sell Put at strike price $180
	Buying PUT gives you the right but no obligation to SELL stock at $195
	By Selling PUT you have the obligation to buy stock at $180
	Hence , if the stock price falls below $195, you make profit; because ,you can buy from market at cheaper rate and sell for $195
	But , if the stock price falls below $180, you make Loss in the second option; you have the obligation to buy at higher rate of $180
	Assume that Price at expiration =S
	1. Buy Put at Strike price $195
	Payoff =Max.((195-S),0)
	2.Sell Put at strike price $180
	Payoff =Min.((S-180),0)