what is the profit why buy a call for $2.10 with a strike price of $45 and sell another call for $0.5 at a strike price of $50, and the stock drops to 0?
The answer is 2.10-0.5=1.6 loss
But i don’t get why-$45 isn’t factored in here, since the $45 stock dropped to zero, aren’t also out the $45?
both calls are worthless if the price goes below $45 ( including $0 ). You are left with the difference in premium , because you are long one and short the other.
Hi CFAWay,
In case you are thinking, Bull call spread includes the ownership of underlying security, that is not correct. The individual getting in to bull call spread just deals with the calls and does not own the underlying security.
You buy a call and sell another call. In the example, you have provided, both calls are out of the money, as Janakisri says and hence just the premium matters. There is no question of losing the $45 because you never owned the stock.
P