Asked by Patricia Garcia on Apr 29, 2024
Verified
You buy one Loews June 60 call contract and one June 60 put contract. The call premium is $5 and the put premium is $3. At expiration, you break even if the stock price is equal to
A) $52.
B) $60.
C) $68.
D) either $52 or $68.
E) None of the options are correct.
Break Even
The point at which total costs and total revenues are equal, resulting in no net loss or gain for a business or investment.
Call Premium
The additional amount above the exercise price that one must pay to purchase a call option.
Put Premium
The price that a put option buyer pays to acquire the right to sell a specified quantity of an asset at a predetermined price before the option expires.
- Utilize understanding of call and put options to ascertain the break-even point, as well as the maximum potential gain and loss.
Verified Answer
AJ
Alexander JulianMay 06, 2024
Final Answer :
D
Explanation :
To break even on a straddle (buying a call and a put with the same strike price and expiration), the stock price must move enough to cover the total cost of the premiums. The total cost is $5 (call) + $3 (put) = $8. Therefore, the stock must either rise to $68 ($60 + $8) or fall to $52 ($60 - $8) to break even.
Learning Objectives
- Utilize understanding of call and put options to ascertain the break-even point, as well as the maximum potential gain and loss.