FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client purchases 100 shares of XYZ stock at $50 per share and simultaneously sells 1 XYZ Oct 50 Put for a premium of $4. What is the breakeven point for this strategy?
- A$46
- B$58
- C$50
- D$54
Show answer & explanationAnswer & explanation
Correct answer: A. $46
This strategy is a long stock/short put combination. The breakeven point is calculated by taking the stock's purchase price and subtracting the premium received from selling the put.
Why the other options are wrong
- B. This calculation is incorrect and overstates the breakeven point.
- C. This is the stock purchase price and put strike price, ignoring the premium.
- D. This would be the breakeven if it were a protective put (long stock, long put).
Long Stock / Short Put Breakeven
The breakeven point for a strategy involving buying stock and simultaneously selling a put option is the stock's purchase price minus the premium received from the put.
- This is a moderately bullish strategy.
- The investor profits if the stock price stays above the breakeven.
- Selling the put generates income, lowering the effective cost of the stock.
Memory trick: Long Stock, Short Put: Lower your cost, Limit your loss.