FRM Part I · FRM Exam Part I · Trading Strategies
A stock trades at $80. An investor buys the stock and writes a call with strike $85 for a $4 premium. What is the breakeven stock price at expiration for the covered call?
The breakeven is $76. The premium of $4 received on the call offsets the first $4 of decline in the stock, so the stock purchase price of $80 minus $4 gives the point where the total profit is zero.
- A$76Correct
- B$81
- C$84
- D$89
Explanation
The covered call breakeven equals the purchase price minus the premium received: 80-4 = $76. Below that the position loses money. $89 wrongly adds the premium to the strike, and $84 adds the premium to the stock price.
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