CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
An investor establishes a bull call spread by buying a call with a strike of 40 for a premium of 6 and writing a call with a strike of 50 for a premium of 2, both on the same share and with the same expiration. The breakeven share price at expiration and the maximum profit per share are closest to:
Breakeven is 44 and maximum profit is 6. The net premium paid is 4, so breakeven is the lower strike 40 plus 4. The maximum payoff is the 10 strike difference, and subtracting the 4 net premium gives a maximum profit of 6.
- ABreakeven 44; maximum profit 6Correct
- BBreakeven 42; maximum profit 10
- CBreakeven 44; maximum profit 10
Explanation
Net premium paid = 6 - 2 = 4. Breakeven = 40 + 4 = 44. Maximum payoff = 50 - 40 = 10, so maximum profit = 10 - 4 = 6. Maximum loss is the 4 net premium. Check: at 50, long call pays 10 and short call pays 0, net 10 - 4 = 6.
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