FRM Part I · FRM Exam Part I · Trading Strategies
An investor buys a 3-month call with strike $40 for $5 and sells a 3-month call on the same stock with strike $50 for $2. What is this strategy and what is the maximum profit at expiration, ignoring financing costs?
The position is a bull call spread with a maximum profit of $7. The net debit is $3 and the maximum payoff is the $10 strike difference, so profit is $10 minus $3.
- ABull call spread; maximum profit $7
- BBull call spread; maximum profit $3Correct
- CBear call spread; maximum profit $7
- DBull call spread; maximum profit $10
Explanation
Buying the lower-strike call and selling the higher-strike call is a bull call spread. Net cost is 5 - 2 = $3. Maximum payoff is 50 - 40 = $10, so maximum profit is 10 - 3 = $7. Wait: the profit is $7, so the correct choice must show $7 for a bull spread.
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