Bull Call Debit Spread Maximum Gain, Loss, and Breakeven
A client establishes the following position when KOP stock is trading at $48: Buy 1 KOP Nov 45 Call at 5.50; Sell 1 KOP Nov 55 Call at 1.50. What are the client's breakeven, maximum potential profit, and maximum potential loss?
Bull call debit spread: Net Debit = 5.50 - 1.50 = $4.00 (Max Loss = $400). Spread width = $55 - $45 = $10.00. Max Gain = Width - Debit = $10 - $4 = $6.00 ($600). Breakeven = Lower Strike + Debit = $45 + $4 = $49.00.
Complete Analysis & Legal Rationale
Net debit = $5.50 - $1.50 = $4.00 ($400). In a debit spread, max loss is the net debit paid. Spread width = $55 - $45 = $10.00. Max profit = Width - Debit = $10 - $4 = $6.00 ($600). Breakeven = Lower Strike ($45) + Net Debit ($4) = $49.00.
Mathematical Step-by-Step Derivation
- Step 1: Net Debit = $5.50 - $1.50 = $4.00 ($400 Max Loss).
- Step 2: Spread Width = $55 - $45 = $10.00 ($1,000).
- Step 3: Max Profit = $10.00 - $4.00 = $6.00 ($600).
- Step 4: Breakeven = $45.00 + $4.00 = $49.00.
- Buy Nov 45 Call-$550.00
- Sell Nov 55 Call+$150.00
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately applies debit spread formulas: Max Loss = $400, Max Gain = $600, Breakeven = $49.00.
Inverts profit and loss figures and computes erroneous breakeven.
Takes total strike width as profit without deducting debit paid.
Correct breakeven, but switches max profit and max loss.