FINRA Series 7Investment Information and Suitable RecommendationsHard
A client purchases 100 shares of XYZ stock at $50 per share and simultaneously sells 1 XYZ 45 put for a premium of $3. What is the breakeven point for this strategy?
- A$50
- B$45
- C$53
- D$47
Show answer & explanationAnswer & explanation
Correct answer: D. $47
This is a synthetic long stock position (long stock + short put). The breakeven point is the price at which the investor neither profits nor loses. The cost of the stock is $50. The premium received from selling the put ($3) reduces the overall cost basis. So, the breakeven is the stock purchase price minus the premium received: $50 - $3 = $47 per share.
Why the other options are wrong
- A. This is the initial stock purchase price, not accounting for the premium received.
- B. This is the strike price of the put option, not the breakeven.
- C. This would be the breakeven for a protective put (long stock + long put), not a short put.
Long Stock / Short Put Breakeven
The price at which an investor who is long stock and simultaneously short a put option will break even, calculated as the stock purchase price minus the premium received from selling the put.
- Known as a synthetic long stock position.
- The premium received from selling the put reduces the effective cost basis of the stock.
- Breakeven is achieved when the stock price equals the reduced cost basis.
Memory trick: Short put 'cuts' your stock's cost to break even.