Asked by Shawn Killens on Apr 27, 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. Your maximum loss from this position could be
A) $500.
B) $300.
C) $800.
D) $200.
E) None of the options are correct.
Maximum Loss
The greatest amount of loss an investor or trader is potentially exposed to in an investment or trade.
Call Premium
The amount a call option buyer pays to the seller over and above the option's intrinsic value, which reflects the time value or speculative premium of the option.
Put Premium
Put premium refers to the price that an investor must pay to purchase a put option, which grants the right to sell a specified quantity of a security at a set strike price up to the expiration date.
- Employ mastery of call and put options to calculate the break-even point, along with the greatest profit and loss possible.
Verified Answer
CK
Cameron KnudsonMay 01, 2024
Final Answer :
C
Explanation :
The maximum loss occurs if the stock price is exactly at the strike price ($60) at expiration. In this case, both the call and the put options expire worthless, and the total loss is the sum of the premiums paid for both options: $5 (call premium) + $3 (put premium) = $8 per share. Since each contract represents 100 shares, the total maximum loss is $8 * 100 = $800.
Learning Objectives
- Employ mastery of call and put options to calculate the break-even point, along with the greatest profit and loss possible.