Bull Put Credit Spread: Income Strategy and Margin Requirement
An investor sells 1 Echo Corp 40 Put for $3.00 and buys 1 Echo Corp 35 Put for $1.00 when Echo is trading at $42. What is the net credit received and the margin requirement to establish this position?
In a credit spread: Net Credit = $3 - $1 = $2.00 ($200 Max Gain). The margin requirement is the Maximum Loss = Strike Difference ($5) - Net Credit ($2) = $3.00 ($300).
Complete Analysis & Legal Rationale
The investor collects $3.00 and pays $1.00, resulting in a net credit of $2.00 per share ($200). Under FINRA Rule 4210 margin rules, the margin required to establish a credit vertical spread is the maximum potential loss: Strike Width ($40 - $35 = $5.00) - Net Credit ($2.00) = $3.00 per share ($300 total).
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:
In a credit spread: Net Credit = $3 - $1 = $2.00 ($200 Max Gain). The margin requirement is the Maximum Loss = Strike Difference ($5) - Net Credit ($2) = $3.00 ($300).
Fails to reflect correct options pricing/mechanics for B.
Fails to reflect correct options pricing/mechanics for C.
Fails to reflect correct options pricing/mechanics for D.
Official Standard: The investor collects $3.00 and pays $1.00, resulting in a net credit of $2.00 per share ($200). Under FINRA Rule 4210 margin rules, the margin requir