Series 7 practice questionmediumOptions — Bull Call Spread
An investor establishes a bull call spread by buying 1 ABC Jun 40 call at $5 and writing 1 ABC Jun 50 call at $2. What is the maximum profit?
- A$300
- B$500
- C$1,000
- D$700✓ Correct answer
Explanation
Why D — $700
The maximum profit on a bull call spread is the difference between the strike prices minus the net premium paid. Strike difference: $50 - $40 = $10. Net premium: $5 - $2 = $3 (debit). Maximum profit: $10 - $3 = $7 per share, or $700 per contract. This occurs when both options are in-the-money at expiration.
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