Chapter 06 · Section 6.1

Coca Cola Spread-2

In the table below are listed the premiums for the Coca-Cola options. At this time, the underlying stock is trading at $ 44 3/8 and you are bullish. You would like to take a position on a spread of $10.

 
        COCA-COLA
strike    calls    puts 
35        10        1/2
40       6 1/4    1 3/8
45       2 3/4    3 7/8
50       1 1/4    6 1/8

With what type of option would you prefer to construct the spread?

a) Calls
No. The purchased spread of 40 - 50 can bring you a profit of $5 ((50-40) - (6 1/4-1 1/4)): which is more than the other spreads. In addition to this the probability to be called upon to exercice is lower with the sale of an out of the money option.
b) Puts

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