FINRA Series 7Investment Information and Suitable RecommendationsMedium
An investor purchases 100 shares of XYZ stock at $60 per share and simultaneously buys 1 XYZ 60 put for $3 to protect the position. What is the investor's breakeven point on this protective put strategy?
- A$57 per share
- B$60 per share
- C$66 per share
- D$63 per share
Show answer & explanationAnswer & explanation
Correct answer: D. $63 per share
In a protective put (married put), breakeven equals the stock purchase price plus the put premium paid: $60 + $3 = $63. The stock must rise above $63 for the investor to show an overall profit, since the premium cost must first be recovered.
Why the other options are wrong
- A. Incorrect — this subtracts the premium rather than adding it.
- B. Incorrect — this ignores the premium paid for the put.
- C. Incorrect — this overstates the premium's effect by doubling it.
Protective Put Breakeven
When long stock is combined with a purchased put, breakeven equals the stock's purchase price plus the put premium paid.
- Max loss is limited to (stock price - strike) + premium, occurring below the strike
- Max gain is unlimited above breakeven
- The put acts as insurance, capping downside risk
Memory trick: Insurance costs a premium — add it to the price to find breakeven.