This strategy is called as bear spread

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Reference no: EM131057796

You have purchased a call option (100 contracts) on Mercer Corporation common stock. The option has an exercise price of $20.00 and Mercer’s stock currently trades at $20.00. The call premium (price) is $2 per contract. (a) Calculate your net profit on the option if Mercer Corporation’s stock price rises to $23.50 and you exercise the option. (b) Calculate your net profit on the option if Mercer Corporation’s stock price does not change over the life of the option. You expect that the price of Microsoft (MSFT, Current price: $53) stocks will fall in future and want to write MSFT September 50 call option at $5.00. However, you want to hedge your risk by purchasing MSFT September 60 call option which is traded at $2.00 at the market. (1) Calculate your total payoff per contract when the stock price will fall/rise to $40, $45, $50, $55, $60, $65, and $70, respectively. (2) Draw the payoff chart for your investment. (Hint: this strategy is called as “bear spread.”)

Reference no: EM131057796

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