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FRM Part I · FRM Exam Part I · Options Markets

A trader buys a put with a strike of $45 for $1.50 and sells a put on the same stock and expiry with a strike of $55 for $4.50 (a bull put spread). What is the breakeven stock price at expiration?

The breakeven price is $52. The trader receives a net credit of $3 (4.50 minus 1.50). The short 55-strike put starts losing below $55, and the credit offsets the first $3 of that loss, so breakeven is 55 minus 3.

  1. A$42.00
  2. B$48.00
  3. C$52.00Correct
  4. D$58.00

Explanation

Net credit = 4.50 - 1.50 = $3. The short $55 put loses money below $55, so the breakeven is 55 - 3 = $52. Adding the credit to $55 gives $58, which wrongly treats the credit as a cost.

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