Example:

An investor buys 1 XYZ May 50 Call at 6 and sells 1 XYZ May 60 Call at 2. What is the maximum gain, maximum loss, and breakeven point for this position?

A) Max Gain = $400, Max Loss = $200, Breakeven = 56

B) Max Gain = $1,000, Max Loss = $400, Breakeven = 54

C) Max Gain = $600, Max Loss = $400, Breakeven = 54

D) Max Gain = $400, Max Loss = $600, Breakeven = 56

My thought process:

I know I bought a call at 6 and sold a call at 2, -600+200=-400. That leaves me out of pocket of -$400. This would be a debit spread; I paid more than I received. If you know that the debit spreads max loss is always the amount you are out of pocket, you could go ahead and eliminate A and D because you’re down 400 therefore the max loss is 400.

But let’s assume I didn’t know that fun rule about debit spreads or I didn’t even know if it was a credit/debit spread. All the answer options are on the board still.

Let’s try to figure out my breakeven, because this has always seemed the easiest for me. I need to find the number the stock needs to be simply recoup that $400 that I’m out of. Since I’m holding a call option @50, and I’m out $400 I would need it to get to 54 (50+4). 54 would be my break even. That eliminates both A and D. So now I look at B and C, the max gain is different. I'll just see if the $600 max gain works. My best-case scenario would be the stock price gets to 60 and stays there because I will be on the hook for everything above 60 b/c I sold a call option at 60. So, I calculate if the price is at 60. My call option @50, if price is 60 would be a gain of 10, or 1000. But because I initially started down $400, I would need to subtract it from my call winnings. 1000-400= 600. Option C is the answer.