# CFA Society Boston Level III 2023 Practice Exam A Bull Spread with Puts

Question Set 3. 4

Hello,
I am going through the CFA Level 3 mock exam and I am struggling with the answer for the bull put spread. Anyone else who thinks that there is an erroneous solution provided?

Here is the example below:

Russ Condon is a client portfolio manager at Lonestar Investments, a small institutional money manager. Three months ago, Condon purchased 500,000 shares of Telestar Motor Corporation (TMC) at a price of \$750 per share.

TMC’s share price fell more than 5% and is currently trading at \$710.50 per share.

David gathers TMC option prices and Greeks as shown in Exhibit 1.

Each option contract covers 100 shares.

After reviewing the data, David recommends that Condon use one of the following strategies.
Strategy 1: To generate temporary cash flow, implement a covered call strategy by selling call options with a strike price of \$730.
Strategy 2: To protect downside risk, implement a collar by buying \$700 puts and selling \$720 calls.
Strategy 3: To generate temporary cash flow, implement a bull spread by selling \$740 puts and buying \$710 puts.

TMC’s stock price increases to \$790 at the option expiration date.

1. Which of David’s recommended strategies results in the largest profit at expiration?
A. Strategy 1
B. Strategy 2
C. Strategy 3

The given solution:
"Strategy 3
If the stock price is \$790, both puts expire worthless and the investor keeps the \$22.08 credit received per option plus any upside on the stock.
Any upside in the stock price is protected as there are no short calls in this strategy.
Capital Gain (unrealized) = 500,000 × (\$790 – \$750) = \$20,000,000
Option Premia Received = 500,000 × \$31.31 = \$15,655,000
Option Cost Incurred = 500,000 × \$9.23 = –\$4,615,000
Profit = \$20,000,000 + \$15,655,000 – \$4,615,000 = \$31,040,000
Ignoring the increased value of the underlying, the profit from this option strategy alone = \$15,655,000 – \$4,615,000 = \$11,040,000
"

Isn’ the upside limited for the bull spread (regardless whether we use puts or calls)?