You are cautiously bullish on the common stock of EXTREME INC over the next several months. The current price of the stock is $59 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: EXTREME INC Underlying Stock price: $59.00 Expiration Strike Call Put June 54.00 9.40 2.45 June59.00 4.95 3.90 June64.00 2.45 8.40 Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $62. Ignoring commissions, the net profit on your position is

$395

Explanation:

A bull put spread is a strategy that is utilized by investors when a moderate rise is being expected in the price of an asset. Investors will purchase put at a lower price and then sells the put option at a strike price that is higher.

In this scenario, the $54 put option will have to be bought and the $64 put option will then be sold.

Profit = Premium received – Premium Paid + Settlement gain/Loss

Since we have been given that the stock's price turns out to be $62 in June, $64 put will be exercised which will lead to ($64 - $62) = $2 loss per option.

The net profit will now be:

= (8.40 - 2.45 - 2) × 100

= 3.95 × 100

= $395

Therefore, the net profit is $395

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