FRM Part I · FRM Exam Part I · Trading Strategies
Compared with outright purchase of a call option on a stock, a bull call spread on the same stock with the same long strike has which characteristic?
A bull call spread costs less than the outright call but caps profit. The premium received from the sold higher-strike call reduces the outlay, while the short call offsets gains once the stock rises above its strike.
- ALower initial cost but capped profitCorrect
- BHigher initial cost and unlimited profit
- CLower initial cost and unlimited profit
- DHigher initial cost but capped loss only
Explanation
Selling the higher-strike call generates premium that reduces the net cost of the position. In return, gains above the higher strike are given up, so profit is capped. The outright call has unlimited upside but costs more.
Did you get it right without looking?
One question tells you little. A timed set on Trading Strategies shows your real accuracy, how long you take and where you lose marks.
More Trading Strategies questions
- A box spread is built from European options on a non-dividend-paying stock with strikes K1 = 40 and K2 = 50, expiring in one year. The conti…
- A long call butterfly is built with strikes 90, 100 and 110 on the same underlying and expiry, costing a net $3 to set up. Ignoring discount…
- An investor owns a share at $80 and buys a six-month put with strike $75 for $4. Ignoring dividends and financing, what is the break-even sh…
- A European box spread with strikes 80 and 100 and one year to maturity is quoted at $18.00. The continuously compounded risk-free rate is 4%…
- An investor buys a share at $50 and writes a one-year call with a strike of $55 for a premium of $3. Ignoring dividends and financing costs,…
- A long call butterfly uses strikes 50, 55 and 60 (long one 50 call, short two 55 calls, long one 60 call) on the same expiry. The net premiu…