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?

b) Puts
Yes. The two bull spreads that can be constructed of puts are the 35-45 and the 40-50. The spread which will profit the most is the second one ($4 3/4), but the probability of being called upon for exercise is very high. Continue

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