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4.A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price below which the trader makes a profit is
A.$25
B.$28
C.$26
D.$20

Answer: D
When the stock price is $20 the two call options provide no payoff. The put option provides a payoff of 30−20 or $10. The total cost of the options is 2×3+ 4 or $10. The stock price in D, $20, is therefore the breakeven stock price below which the position is profitable because it is the price for which the cost of the options equals the payoff.

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FeltonRolfson (11.03.2025)

To find the breakeven, we need the put option payoff to cover the initial cost of $10 (2 calls x $3 + 1 put x $4). So, $30 - Stock Price = $10, thus Stock Price = $20. This is a solid options play strategy, almost as satisfying as clearing a line in Block Blast! A deeper dive into option Greeks could further enrich this analysis.
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ErikSturgill (05.09.2024)

With a $30 strike call and a $30 put, the total cost is 2×3 + 4 = $10. When the stock price is $20, the put has a profit of 30 - 20 = $10, covering the cost. So the break-even stock price is $20. If you like a challenge, try http://iogamesonl.com/ to get a taste of strategy and competition!

scaredelement (16.05.2023)

Because the cost of the options equals the payment, the stock price in D, $20, is the breakeven stock price below which the position is profitable. http://drifthunters2.io

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015

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