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Bubba buys one XYZ September 50 call at $7 and sells one XYZ September 60 call at $3. At that time, XYZ stock is at $55. Bubba has no other stock positions.
What is Bubba's maximum possible profit?
Suggested Answer: B
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$600. The maximum profit is the difference between strike prices less the debit amount. The debit amount is $4 ($7 - $3). The difference between strike prices is $10 ($60 - $50). Multiply the $6 difference by 100, which is the number of shares on one option.
11 comments · newest first
NA
Natalie
1 year ago
He pays $4 net for the spread, so $600 is spot on!
LU
Luke
1 year ago
Wait, how can he make that much? Sounds too good to be true.
LE
Leonie
1 year ago
Nope, it's definitely $600.
VI
Vivienne
1 year ago
I think it's actually $1,000, right?
MA
Maia
1 year ago
Maximum profit is $600 if it hits $60.
CA
Carylon
1 year ago
I feel like the answer might be $600, but I’m not confident. I need to double-check how the premiums affect the profit calculation.
VA
Valentine
1 year ago
If I recall correctly, the max profit for a call spread is capped, so it can't be unlimited. I just can't remember the exact numbers involved.
JO
Joanna
1 year ago
I remember a similar question where we had to find the profit from a spread. I think the max profit here would be the difference between the strikes minus the cost of the calls.
DE
Destiny
1 year ago
I think the maximum profit is related to the difference between the strike prices minus the net premium paid, but I'm not entirely sure how to calculate that.
LA
Lang
1 year ago
I'm a bit confused on this one. I'll need to review my notes and the course material to make sure I understand the correct way to count FTRs for an EI.
LY
Lynelle
1 year ago
Okay, I've got this. The key here is data privacy - that's the compliance requirement we need to address in the design. The other options are not relevant to this specific scenario.