FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client establishes a credit call spread by selling 1 XYZ 60 Call for $5 and buying 1 XYZ 65 Call for $2. What is the maximum profit for this strategy?
- A$500
- B$300
- CUnlimited
- D$200
Show answer & explanationAnswer & explanation
Correct answer: B. $300
A credit call spread is established by selling a call with a lower strike price and buying a call with a higher strike price. The maximum profit is the net credit received when establishing the spread.
Why the other options are wrong
- A. This is the premium received on the short call, not the net profit.
- C. Incorrect. All spread strategies have limited profit and limited loss.
- D. This is the premium paid on the long call, not the net profit.
Credit Call Spread Maximum Profit
For a credit call spread, the maximum profit is the net credit received when the strategy is established, which occurs if both options expire out-of-the-money.
- Strategy involves selling a lower strike call and buying a higher strike call.
- Bullish to neutral outlook.
- Profit is received upfront and kept if stock stays below the lower strike.
Memory trick: Credit Call: Get Credit, hope stock stays below Call.