Bull Put Credit Spread Strategy and Maximum Loss
An investor is moderately bullish on GHI stock trading at $82. The investor sells 1 GHI Nov 80 Put at 4.00 and buys 1 GHI Nov 75 Put at 1.50. What is the net credit received, maximum loss, and breakeven point?
Bull put credit spread: Net Credit = 4.00 - 1.50 = $2.50 ($250 Max Gain). Width = $80 - $75 = $5.00 ($500). Max Loss = Width - Credit = $5 - $2.50 = $2.50 ($250). Breakeven = Higher Strike - Credit = $80 - $2.50 = $77.50.
Complete Analysis & Legal Rationale
The investor writes the higher strike 80 put for $4.00 and buys the 75 put for $1.50, collecting a net credit of $2.50 ($250). Spread width is $5.00 ($500). Max Loss = Width ($5.00) - Credit ($2.50) = $2.50 ($250). Breakeven = $80.00 - $2.50 = $77.50.
Mathematical Step-by-Step Derivation
- Step 1: Net Credit = $4.00 received - $1.50 paid = $2.50 ($250 Max Gain).
- Step 2: Spread Width = $80 - $75 = $5.00 ($500).
- Step 3: Max Loss = Spread Width ($5.00) - Net Credit ($2.50) = $2.50 ($250).
- Step 4: Breakeven = Higher Strike ($80.00) - Net Credit ($2.50) = $77.50.
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 calculates net credit ($250), max loss ($250), and breakeven ($77.50).
Overstates max loss as entire width and adds credit to higher strike.
Ignores the premium paid on the protective put.
Reverses premiums paid and received.