FRM Part I · FRM Exam Part I · Trading Strategies
A trader buys a 6-month put with strike $60 for $7.50 and sells a 6-month put with strike $50 for $3.00 on the same stock. What is the breakeven stock price at expiration, ignoring discounting?
The breakeven is $55.50. The bear put spread costs $4.50 net, and between the strikes its payoff equals 60 minus the stock price. Setting 60 minus S equal to 4.50 gives a stock price of $55.50 at expiration.
- A$45.50
- B$52.50
- C$55.50Correct
- D$57.50
Explanation
This is a bear put spread with net cost 7.50 - 3.00 = $4.50. The payoff is 60 - S for S between 50 and 60, so breakeven requires 60 - S = 4.50, giving S = $55.50. Using $52.50 wrongly subtracts the debit from the lower strike-based midpoint, and $45.50 comes from 50 - 4.50.
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