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FRM Part I · FRM Exam Part I · Options Markets

A trader constructs a bull spread using calls: buys a call with strike $30 for $4 and writes a call with strike $35 for $1.50. Which statement correctly describes the position at expiration?

The bull call spread breaks even at $32.50 and has maximum profit of $2.50 for stock at or above $35. The net cost is $2.50, the payoff is capped at the $5 strike difference, and breakeven equals the lower strike plus net cost.

  1. AMaximum profit is $2.50 and occurs when the stock is at or above $35
  2. BMaximum profit is $5.00 and occurs when the stock is at or above $35
  3. CBreakeven stock price is $33.50 and maximum loss is $1.50
  4. DBreakeven stock price is $32.50 and maximum profit is $2.50 when the stock is at or above $35Correct

Explanation

Net cost = 4 - 1.5 = $2.50, which is the maximum loss when stock is at or below $30. Maximum payoff is the strike difference of $5, so maximum profit is 5 - 2.5 = $2.50 at or above $35. Breakeven = 30 + 2.5 = $32.50. The other options use the wrong profit or breakeven.

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