In this example:
An options trader believes that XYZ stock trading at $42 is going to rally soon and enters a bull call spread by buying a JUL 40 call for $300 and writing a JUL 45 call for $100. The net investment required to put on the spread is a debit of $200.
The stock price of XYZ begins to rise and closes at $46 on expiration date. Both options expire in-the-money with the JUL 40 call having an intrinsic value of $600 and the JUL 45 call having an intrinsic value of $100. This means that the spread is now worth $500 at expiration. Since the trader had a debit of $200 when he bought the spread, his net profit is $300.
If the price of XYZ had declined to $38 instead, both options expire worthless. The trader will lose his entire investment of $200, which is also his maximum possible loss.
I don't understand this part:
the JUL 45 call having an intrinsic value of $100. This means that the spread is now worth $500 at expiration.
Why is the value computed by subtracting 600 - 100?
If I am selling 45 Call that means:
- As a writer: I want stock price to go down or stay at strike.
- As a buyer: I want stock price to go up.