Chapter 06 · Section 6.1

IBM Calls

In the table below, we see the evolution in time of the theoretical prices of the April call options on IBM with a unchanged stock price of $105. If you anticipate the situation to remain stable or a slight downturn in the underlying for some days, how do you make use of this information in the formation of the spread?

                  Calls IBM April
Strike    -35 d    -25 d   -15 d   -0 d  
100       6.867    6.330   5.751   5.000
105       3.860    3.277   2.431   0.000
110       2.001    1.420   0.786   0.000

a) B 105 / S 110
b) B 105 / S 100
• c) B 110 / S 105
  Yes. Since, in absolute terms, the time value of the 105 call diminishes fastest, the sale of this option represents the best solution if it is coupled with the purchase of a 110 call which is the call that loses its value the slowest. Continue
  d) B 100 / S 105

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