FRM Part I · FRM Exam Part I · Options Markets
An investor buys a bear put spread by buying a put with a strike of $70 for $8 and selling a put with a strike of $60 for $3. If the stock finishes at $55 at expiration, what is the net profit per share?
The net profit is $5 per share. The spread costs $5 (8 minus 3). With the stock at $55, the long 70 put pays 15 and the short 60 put costs 5, a payoff of 10, so profit is 10 minus 5.
- A$5Correct
- B$10
- C$0
- D-$5
Explanation
Net cost = 8 - 3 = $5. At $55 both puts are in the money: long pays 15, short pays -5, net payoff 10. Profit = 10 - 5 = $5. The $10 option ignores the initial cost.
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