Assume that XYZ stock is trading with following three month call prices 5

Finance Jan 13, 2021

Assume that XYZ stock is trading with following three month call prices 5.20 and 3.75 with the strike prices 70 and 80 rupees respectively. Assume that Mr. DRM believes that XYZ stock prices falls in the next three months and based on this information create and appropriate trading strategy and find out maximum profit if price falls to 50 rupees.

Expert Solution

Call Spread: Sell strike 70 call and Buy 80 strike call

Profit per share=-MAX(50-70,0)+MAX(50-80,0)+5.20-3.75
=1.450000

Profit per contract=145

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