FRM Part I · FRM Exam Part I · Options Markets
An investor buys a call with strike $30 for $4, sells a call with strike $35 for $2, and both expire in the same month. Which describes the position and its maximum profit?
It is a bull call spread with a maximum profit of $3. The net debit is $2, and the maximum payoff is the $5 strike difference, reached at prices at or above $35. Profit is therefore 5 minus 2, or $3.
- ABull call spread; maximum profit $3Correct
- BBull call spread; maximum profit $5
- CBear call spread; maximum profit $3
- DBull call spread; maximum profit $2
Explanation
Buying the lower-strike call and selling the higher-strike call is a bull spread. Net cost is 4 - 2 = $2. Maximum payoff is 35 - 30 = $5, so maximum profit is 5 - 2 = $3. $5 ignores the net cost.
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