Final answer:
The options trading strategy involves a combination of buying and selling call options. The maximum loss is the premium paid for the long position minus the premium received for the short position, resulting in a loss of $6 per share, while the maximum gain is the difference between strike prices minus net premiums, leading to a gain of $4 per share.
Step-by-step explanation:
The question pertains to an options trading strategy involving a long call and a short call position. When the trader is long 10 ALF Apr 40 calls at 6, it means the trader paid $6 per share for the right to buy the stock at $40. On the other hand, by being short 10 ALF Apr 50 calls at 2, the trader has collected $2 per share for the obligation to sell the stock at $50 if the option is exercised. To analyze the maximum gain and loss per share, we'll look at the best and worst-case scenarios.
If the stock price at expiration is at or below $40, both options expire worthless. The trader would lose the entire premium paid for the long calls without any offsetting gain from the short calls, resulting in a maximum loss of 6 per share (the $6 premium paid for the long position).
If the stock price at expiration is above $50, both options are exercised. The trader buys the stock at $40 and sells it at $50. The profit from this part of the trade is $10 per share ($50 - $40), but the trader has to subtract the net premiums paid and received ($6 - $2), which results in a maximum gain of 4 per share.
Therefore, the correct answer is D) Gain 4, loss 6. The client's maximum gain per share is $4, and the maximum loss per share is $6.