FINRA Series 7Investment Information and Suitable RecommendationsHard
An investor owns 100 shares of XYZ stock purchased at $60 per share. To protect against a decline while generating some income, the investor buys 1 XYZ 55 put for $2 and sells 1 XYZ 65 call for $3, creating a collar. What is the investor's maximum possible loss on this position?
- A$400
- B$500
- C$200
- D$300
Show answer & explanationAnswer & explanation
Correct answer: A. $400
Net premium received = $3 (call) − $2 (put) = $1 credit. Maximum loss = (stock purchase price − put strike) − net credit = ($60 − $55) − $1 = $4 × 100 shares = $400.
Why the other options are wrong
- B. This overstates the loss by not subtracting the net premium credit.
- C. This ignores the put strike protection and net credit calculation.
- D. This does not correctly incorporate the collar's net credit.
Collar Strategy Maximum Loss
A collar (long stock + long put + short call) limits both gain and loss; max loss equals purchase price minus put strike, minus net premium received.
- Protects downside via long put
- Finances put with short call premium
- Max loss = (purchase price − put strike) − net credit
Memory trick: 'A collar locks the stock in a tight range like a leash.'