Why is this option strategy's lower bound $50?

Question

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Why is the payoff 0 when the price drops under 50? When we sell the short call, we get $60 and we need to cover our position so if the price drops to let’s say $40. We don’t need to execute the option but don’t we need to buy the stock at $40 from the market and return the underlying security? And therefore, we still gain 60-40=20?

I am new to this concept so I am sorry if the answer seems very obvious.

options

I am new to this concept so I am sorry if the answer seems very obvious.

Bob Baerker · Answer

$50 and $60 are the strike prices of the calls.

The graphs in each picture are correct in that they depict the nature of the P&L curve for each strategy.  However, they are deficient because the numbers on the X axis have no relevance to anything. You cannot have a P&L curve if you don't know either the respective  premiums or the net premium.  Here's an example:

XYZ = $56.00

Jun $50c = $6.50

Jun $60c = $1.00

Buying this bullish call spread costs $5.50.  On an expiration basis:

Break even is $55.50 
Maximum profit is $4.50 at or above $60.00
Maximum loss is $5.50 at or below $50.00

Why is this option strategy's lower bound $50?

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