Bear Call Credit Spread: Maximum Gain, Risk, and Breakeven Calculation
An investor establishes a moderately bearish position by selling 1 Titan Corp Jun 50 Call for $4.25 and buying 1 Titan Corp Jun 55 Call for $1.50 when Titan trades at $49. What is the investor's maximum potential profit, maximum potential loss, and breakeven point per share?
In a credit call spread: Net Credit = $4.25 - $1.50 = $2.75 ($275 Max Gain). Strike difference = $55 - $50 = $5. Max Loss = $5 - $2.75 = $2.25 ($225). Breakeven = Lower Strike + Net Credit = $50 + $2.75 = $52.75.
Complete Analysis & Legal Rationale
The investor collects a net credit of $4.25 - $1.50 = $2.75 per share ($275 total), which is the maximum profit realized if both calls expire worthless below $50. The strike spread is $55 - $50 = $5.00. Maximum loss is Strike Spread ($5.00) - Net Credit ($2.75) = $2.25 per share ($225 total). Breakeven = Lower Call Strike ($50) + Net Credit ($2.75) = $52.75.
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 computes net credit ($275), maximum risk ($225), and call breakeven ($52.75).
Inverts max gain and max loss calculations.
Ignores the offsetting long call premium and cap on maximum loss.
Believes risk is unlimited; the purchased $55 call strictly caps the maximum loss at $225.
Official Standard: Defines credit call spreads and establishes maximum loss as margin requirement.