FINRA Series 7Investment Information and Suitable RecommendationsMedium
An investor purchases 1 XYZ 50 call for $3 and 1 XYZ 50 put for $2, both expiring in the same month. What are the investor's breakeven points at expiration?
- A$50 and $55
- B$47 and $53
- C$45 and $55
- D$48 and $52
Show answer & explanationAnswer & explanation
Correct answer: C. $45 and $55
This is a long straddle. Total premium paid = $3 + $2 = $5. Breakeven points = strike ± total premium = $50 + $5 = $55 (upside) and $50 − $5 = $45 (downside).
Why the other options are wrong
- A. Incorrect — only calculates one correct breakeven; the lower one is miscalculated.
- B. Incorrect — uses wrong total premium ($3 instead of $5).
- D. Incorrect — uses wrong total premium ($2 instead of $5).
Long Straddle Breakeven
A long straddle involves buying a call and put at the same strike and expiration; breakeven points are the strike price plus and minus the total premium paid.
- Profits from large price moves in either direction
- Max loss = total premium paid
- Breakeven = strike ± total premium
- Used when volatility is expected but direction is uncertain
Memory trick: Straddle = 'strike plus or minus the stack of premiums.'