FRM Part I · FRM Exam Part I · Options Markets
An investor buys a call option with a strike of $50 for $6 and sells a call option on the same stock and expiry with a strike of $60 for $2. What is the maximum profit on this bull call spread at expiration, per share?
The maximum profit is $6 per share. The spread costs $4 net (6 minus 2) and pays at most $10, the difference between strikes, when the stock finishes at or above $60. Profit is therefore 10 minus 4, which equals $6.
- A$4
- B$6Correct
- C$10
- D$14
Explanation
Net cost = 6 - 2 = $4. The maximum payoff is the strike difference, 60 - 50 = $10, reached when the stock is at or above $60. Maximum profit = 10 - 4 = $6. Choosing $4 confuses the net premium with the profit; $10 ignores the net cost.
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