FINRA Series 7Investment Information and Suitable RecommendationsMedium
An investor establishes a bull call spread by buying 1 XYZ 50 call for $5 and selling 1 XYZ 60 call for $2, both expiring in the same month. What is the investor's maximum possible loss on this position?
- A$300
- B$700
- C$200
- DUnlimited
Show answer & explanationAnswer & explanation
Correct answer: A. $300
Maximum loss on a debit spread equals the net premium paid. Net debit = $5 (paid) − $2 (received) = $3 = $300 per contract. This loss occurs if XYZ closes at or below $50 at expiration, causing both options to expire worthless.
Why the other options are wrong
- B. Incorrect — $700 would be the maximum gain, not the maximum loss.
- C. Incorrect — $200 does not reflect the correct net debit paid.
- D. Incorrect — spreads have limited (not unlimited) risk since both legs are options.
Bull Call Spread Maximum Loss
In a bull call spread, the maximum loss is limited to the net debit (premium) paid to establish the position.
- Max loss = net debit paid
- Max gain = difference in strikes minus net debit
- Breakeven = lower strike + net debit
Memory trick: Debit spreads: you can never lose more than you paid.