A bull call spread has a capped payoff

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

A learner builds a bull call spread on a fictional cash-settled index. She buys one call with strike 20,000 for a premium of 150 points and sells one call with strike 20,200 for a premium of 70 points. Both options have the same expiry and a hypothetical contract multiplier of 40 units per point. At expiry, a call’s payoff per unit is the greater of settlement index minus strike or zero. Evaluate both options together. Ignore charges, taxes, margin funding and early closure. The multiplier is a teaching assumption, not a statement about the current NIFTY or BANKNIFTY lot size.

Both legs expire together and cash settlement uses the same index value.

All requested profits include the initial net premium.

1. Q1What is the initial net premium paid for the spread?

   • A

     Option A. ₹3,200 — Correct answer

   • B

     Option B. ₹6,000

     Why it is wrong: This includes the purchased call premium but omits premium received.

   • C

     Option C. ₹2,800

     Why it is wrong: This is the sold call premium received, not net debit.

   • D

     Option D. ₹8,800

     Why it is wrong: This adds the premiums instead of netting the receipt.

   Answer: A. Net debit = (150 − 70) × 40 = ₹3,200. This is the spread’s maximum expiry loss under the assumptions. Remember: Net entry cost combines both option legs.

   Hint, shown before you answer in practice mode: Subtract received premium before multiplying by 40.

   VIII-P-C01-Q1easynumerical

   Study this unit

2. Q2What is the expiry breakeven index level?

   • A

     Option A. 20,200

     Why it is wrong: This is the upper strike, where gross payoff becomes capped.

   • B

     Option B. 20,150

     Why it is wrong: This ignores premium received from selling the higher-strike call.

   • C

     Option C. 19,920

     Why it is wrong: This subtracts rather than adds the net premium to the lower strike.

   • D

     Option D. 20,080 — Correct answer

   Answer: D. Breakeven = 20,000 + (150 − 70) = 20,080. Between the strikes, gross payoff grows point-for-point. Remember: A debit spread’s breakeven reflects its net debit.

   Hint, shown before you answer in practice mode: Add the 80-point net debit to the lower strike.

   VIII-P-C01-Q2mediumnumerical

   Study this unit

3. Q3What is the maximum net profit at expiry?

   • A

     Option A. ₹8,000

     Why it is wrong: This is the maximum gross spread payoff before deducting the entry debit.

   • B

     Option B. ₹4,800 — Correct answer

   • C

     Option C. Unlimited

     Why it is wrong: The short higher-strike call caps the gross payoff.

   • D

     Option D. ₹3,200

     Why it is wrong: This is the initial debit and maximum loss.

   Answer: B. Maximum net profit = (20,200 − 20,000 − 80) × 40 = ₹4,800. Above 20,200 the two calls’ additional payoffs cancel. Remember: A bull call spread exchanges unlimited upside for a lower entry cost.

   Hint, shown before you answer in practice mode: Subtract the net debit from the 200-point strike width.

   VIII-P-C01-Q3mediumnumerical

   Study this unit

4. Q4If the index settles at 20,120, what is the net profit?

   • A

     Option A. ₹1,600 — Correct answer

   • B

     Option B. ₹4,800

     Why it is wrong: This is the gross payoff of the long call at this settlement, before deducting net debit.

   • C

     Option C. A loss of ₹1,600

     Why it is wrong: The settlement is 40 points above breakeven, so the spread is profitable.

   • D

     Option D. ₹2,800

     Why it is wrong: This is the premium received on the short call.

   Answer: A. Net profit = [max(20,120 − 20,000, 0) − max(20,120 − 20,200, 0) − 80] × 40 = ₹1,600. Remember: Calculate payoff first, then subtract the net cost.

   Hint, shown before you answer in practice mode: The lower call pays 120 points and the upper call pays zero.

   VIII-P-C01-Q4hardnumerical

   Study this unit