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
b) Puts
Calculate the potential profits and losses for all the $10 spreads. You should then examine the potential probability that you will be called upon for exercise (ie. which would decrease your profits).
There are four spreads of $10: Two with calls and two with puts.