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Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2

a) What is the maximum potential profit of your strategy?

b) If, at expiration, the price of a share of IBM stock is $103, what would your profit be?

c) What is the maximum loss you could suffer from your strategy?

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Solution Summary

The solution calculates the maximum potential profit of purchasing one IBM May 100 call contract and writing one IBM May 105 call contract.

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Suppose you purchase one IBM May 100 call contract at $5 and write one IBM May 105 call contract at $2

a) What is the maximum potential profit of your strategy?
Maximum payoff is when the stock price is $105 and beyond
At a stock price of $105,
Payoff from the call contract with the strike price of $100 is (Stock price- Exercise price) = (105-100) = $5
Payoff from the ...

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