Question

There are times when you think the market is going to rise over the next two months; however in the event that the market does not rise, you would like to limit your downside. One way you could do this is by entering into a spread. A spread trading strategy involves taking a position in two or more options of the same type, that is, two or more calls or two or more puts. A spread that is designed to profit if the price goes up is called a bull spread. Discuss the case with an example.

Hint:

Remember: A bull spread allows you to limit your risk while profiting from moderate price increases in the underlying asset. The risk is the net premium paid, and the reward is the difference between the strike prices.

Answer 1