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Suppose we have the following information for the index $S$:

current price = $ \$1000$ risk free rate $4 \%$ convertible semiannualy

What is the net premium to create a $ \$ 1000- \$ 1050$ bull spread using call options?

So I want to buy the $ \$1000$ call option and sell the $ \$ 1050$ call option. The price of a 6-month $ \$ 1000$ call is $93.809$. The price of a 6-month $ \$ 1050$ call is $71.802$.

So why is the net premium $93.809 - 71.802$? If I am buying (selling) something shouldn't I be losing (making) money? Hence it should be $-93.809 + 71.802$?

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closed as off topic by Joshua Chance, Tal Fishman, Bob Jansen, Steve, olaker♦ Sep 18 '11 at 19:36

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1 Answer

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What is your confusion? To buy a bull spread, you pay the net premium of 93.809-71.802=22.007. Net premium, which you pay, is positive, because you pay a positive amount to buy a bull spread. BTW, this is not exactly a quantitative finance question, more like a question about the definition of premium, and would be more at home in Personal Finance & Money.

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Why isn't this question closed? – Joshua Chance Sep 18 '11 at 7:33
Good question, more people need to vote to close! – Tal Fishman Sep 18 '11 at 11:15

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