FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client establishes a credit call spread by selling 1 XYZ 60 Call for a premium of $5 and buying 1 XYZ 65 Call for a premium of $2. What is the maximum profit this client can realize on this strategy?
- A$500
- B$200
- C$50
- D$300
Show answer & explanationAnswer & explanation
Correct answer: D. $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, both for the same underlying asset and expiration. The maximum profit is the net premium received. In this case, the client receives $500 for selling the 60 Call and pays $200 for buying the 65 Call. The net premium received is $500 - $200 = $300.
Why the other options are wrong
- A. This is just the premium received from selling the short call, not accounting for the cost of the long call.
- B. This is the maximum loss, not the maximum profit.
- C. This calculation is incorrect and does not represent a valid profit or loss for this strategy.
Credit Call Spread Maximum Profit
The highest possible profit from a credit call spread, which is equal to the net premium received when establishing the spread.
- Involves selling a call with a lower strike and buying a call with a higher strike.
- The investor receives a net premium upfront.
- Maximum profit occurs if both options expire worthless (stock price below lower strike).
Memory trick: Credit spreads collect cash, max profit is the net.