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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 above which the trader makes a profit is

A.$35

B.$40

C.$30

D.$36

A.$35

B.$40

C.$30

D.$36

Answer: A

When the stock price is $35, the two call options provide a payoff of 2×(35−30) or $10. The put option provides no payoff. The total cost of the options is 2×3+ 4 or $10. The stock price in A, $35, is therefore the breakeven stock price above which the position is profitable because it is the price for which the cost of the options equals the payoff.

When the stock price is $35, the two call options provide a payoff of 2×(35−30) or $10. The put option provides no payoff. The total cost of the options is 2×3+ 4 or $10. The stock price in A, $35, is therefore the breakeven stock price above which the position is profitable because it is the price for which the cost of the options equals the payoff.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015