FRM Part I · FRM Exam Part I · Properties of Options
An investor builds a bull call spread on a non-dividend-paying stock by buying a call with a strike of 50 for 6 and selling a call with a strike of 60 for 2, both with the same expiry. What is the maximum profit per share at expiry, ignoring financing costs?
The maximum profit is 6 per share. The spread costs 4 net, and its largest payoff is the 10 difference between the strikes, reached when the stock finishes at or above 60. Profit is therefore 10 minus 4, which is 6.
- A4
- B6Correct
- C10
- D8
Explanation
The net premium paid is 6 - 2 = 4. The maximum payoff occurs when the stock is at or above 60 and equals the strike difference of 10. Maximum profit is 10 - 4 = 6. Choosing 10 ignores the net premium paid, and 4 is just the maximum loss.
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