CMA Final · Strategic Financial Management · Options
A trader sets up a bull call spread on a stock with a lot size of 1,000 shares: buys a call with strike Rs 100 at a premium of Rs 12 and sells a call with strike Rs 110 at a premium of Rs 5. What is the maximum profit on one lot at expiry?
The maximum profit is Rs 3,000 per lot. The spread pays at most Rs 10 per share, the difference between strikes, and the net premium paid is Rs 7 per share. The Rs 3 net per share across 1,000 shares gives Rs 3,000.
- ARs 3,000Correct
- BRs 7,000
- CRs 10,000
- DRs 17,000
Explanation
Net premium paid = 12 - 5 = Rs 7 per share. The maximum spread payoff is 110 - 100 = Rs 10 when the spot is at or above 110. Maximum profit = 10 - 7 = Rs 3 per share, or Rs 3,000 per lot. Rs 7,000 is the maximum loss and Rs 10,000 ignores the net premium.
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