FRM Part I · FRM Exam Part I · Trading Strategies
An investor owns a share at $80 and buys a six-month put with strike $75 for $4. Ignoring dividends and financing, what is the break-even share price at expiration for the combined position?
The break-even price is $84. The investor paid $80 for the share and $4 for the put, so the stock must rise to $84 at expiration to recover the total outlay of $84 when the put is out of the money.
- A$71
- B$76
- C$79
- D$84Correct
Explanation
The protective put costs $4 on top of the stock purchase, so the position breaks even when the stock is at 80 + 4 = $84. $71 subtracts the premium from the strike, and $76 or $79 do not reflect the total cost.
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