Unit 5

Question 1

Max Gain Debit Call Spread

Answer 1

When the market price is at or above the high call.
Difference between the high X price and low X price subtract net premium

Max Gross = high X price - low X price - net premium

Net premium = high premium - low premium

+C Dec $1400 @$8
-C Dec $1420 @4

Net p = -8+4=-4

1420 - 1400 - 4=16

Max gain =$16

Question 2

Max Loss Debit Call Spread

Answer 2

No investor will exercise when the underline is out of the money. Hence
Max Loss = net premium

Question 3

Break Even (BE) Debit Call Spread (DCS)

Answer 3

Occurs when the Market Price (MP) is above the lower lower Call strick price plus the Net P
+C Dec 1400 @-$8
-C Dec 1410 @$4

Net P = -$8 +$5 =-$4
BE = L X price + Net P
$1400 + -$4 = $1404

Question 4

Risk and Reward

Spread, Straddle, and Combination

Answer 4

Get protection from the +C and -C position.
Covered

They have partial protection: They have long and short options

Bullish: Bulls buy Calls and Call Spreads
+C Dec $100 Long the underline
Bearish: Bears sell Calls and Call Spread
-C Dec $110 Short the underline

Bearish: Bears buy Puts and Put Spreads
+P Dec $100 short the underline
Bullish: Bulls sell Puts and Put Spreads
-P Dec 110 Long the underline

Debit Spread : Cost money - Buy spread
Credit Spread : Gain money Sell spread

Question 5

Buy Spread

Answer 5

Debit Spread cost money

See Risk and Reward FlashCard

Question 6

Sell Spread

Answer 6

Credit Spread - Gain money

See Risk and Reward FlashCard