Series 7 practice questionhardOptions — Bull Call Spread Maximum Scenarios
An investor buys 1 RST May 25 call at $5 and writes 1 RST May 35 call at $2. If RST closes at $32 at expiration, what is the profit?
- A$200
- B$300
- C$400✓ Correct answer
- D$700
Explanation
Why C — $400
Net debit = $5 - $2 = $3. At $32: the long 25 call is worth $7 ($32 - $25), the short 35 call expires worthless (stock below $35). Profit = intrinsic value - net debit = $7 - $3 = $4 per share, or $400. This is less than the maximum profit of $700 (which would occur at $35 or above).
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