FRM Part I · FRM Exam Part I · Options Markets
A trader establishes a bear put spread by buying a 70-strike put for USD 7.20 and selling a 60-strike put for USD 3.10, same expiry. What is the breakeven stock price at expiry?
The breakeven is USD 65.90. The bear put spread costs a net USD 4.10, and the position starts to profit only when the intrinsic value of the long 70 put net of the short put exceeds that cost, so breakeven is 70 minus 4.10.
- AUSD 62.90
- BUSD 65.90Correct
- CUSD 63.10
- DUSD 66.90
Explanation
Net debit = 7.20 - 3.10 = 4.10. The spread gains when the stock falls below the higher strike, so breakeven = 70 - 4.10 = 65.90. Using 60 + 4.10 = 64.10 or other combinations ignores that the long put is at 70.
Did you get it right without looking?
One question tells you little. A timed set on Options Markets shows your real accuracy, how long you take and where you lose marks.
More Options Markets questions
- A trader observes a non-dividend stock at $100. A one-year European call with strike $105 costs $7.00, and a one-year European put with stri…
- A trader writes 10 naked call option contracts, each on 100 shares, with strike $40 and option price $3. The stock price is $38. The CBOE-st…
- A non-dividend-paying stock trades at USD 50. A European call with strike USD 45 expires in one year, and the continuously compounded risk-f…
- Which statement about the effect of an expected dividend increase on American-style options on a stock, holding other factors constant, is c…
- A European put on a non-dividend-paying stock has strike USD 80, six months to expiry, and a continuously compounded risk-free rate of 5%. T…
- An investor writes 5 naked call contracts (100 shares each) on a stock priced at $40, with a strike of $45 and premium of $2 per share. Usin…