FRM Part I · FRM Exam Part I · Trading Strategies
A stock trades at $100. A trader sets up a bear call spread by selling a 3-month call with strike $95 for $9.00 and buying a 3-month call with strike $110 for $2.00. Ignoring discounting, what is the maximum loss and the stock price at which it occurs?
The maximum loss is $8.00, occurring when the stock finishes at or above $110. The spread brings in a $7.00 net credit, but the liability reaches the $15 strike difference, so the loss is 15 minus 7, which equals $8.00.
- A$8.00 at any price at or above $110Correct
- B$7.00 at any price at or above $110
- C$15.00 at any price at or above $110
- D$8.00 at any price at or below $95
Explanation
Net credit is 9 - 2 = $7.00. Maximum payout on the short spread is the strike difference of $15, reached when the stock is at or above $110. Maximum loss is 15 - 7 = $8.00. The $7.00 option confuses the credit with the loss, and $15.00 ignores the credit.
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