Bear Call Credit Spread Mechanics and Profit Conditions
An investor sells 1 ABC Jan 50 Call at 4.50 and purchases 1 ABC Jan 55 Call at 1.50. Under what market conditions does the investor realize the maximum gain?
In a bear call credit spread, maximum profit is achieved when both calls expire out-of-the-money, which occurs whenever the stock finishes at or below the lower strike ($50).
Complete Analysis & Legal Rationale
This is a bear call credit spread (net credit = $4.50 - $1.50 = $3.00). If ABC is at or below $50 at expiration, both the 50 call and 55 call expire worthless. The investor retains the entire $3.00 ($300) credit.
Mathematical Step-by-Step Derivation
- Step 1: Net Credit = $4.50 - $1.50 = $3.00 ($300).
- Step 2: Both options expire out of the money if Stock ≤ $50.
- Step 3: Maximum profit ($300) is realized at any price ≤ $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:
Both calls expire worthless at or below $50, securing maximum net credit.
At or above $55, the position suffers its maximum loss ($200).
$53 is the breakeven price (50 + 3.00), where net profit is zero.
The stock does not need to drop to zero; any price at or below $50 captures 100% of maximum profit.
Official Standard: Rules governing credit spread risk/reward definitions.