FINRA Series 7Investment Information and Suitable RecommendationsMedium
A client purchases 100 shares of XYZ stock at $60 per share and simultaneously buys 1 XYZ 55 Put for a premium of $4. What is the breakeven point for this protective put strategy?
- A$64
- B$60
- C$59
- D$55
Show answer & explanationAnswer & explanation
Correct answer: A. $64
For a protective put, the breakeven point is the stock purchase price plus the put premium paid. In this case, $60 (stock purchase price) + $4 (put premium) = $64.
Why the other options are wrong
- B. This is the stock purchase price; the premium paid must be recovered for breakeven.
- C. This would be the breakeven if the premium were $1.
- D. This is the strike price of the put, which is the protection level, not the breakeven.
Protective Put Breakeven
The stock price at which an investor using a protective put strategy will incur no net gain or loss, calculated as the stock purchase price plus the put premium.
- A protective put involves buying a put option on stock already owned.
- It limits downside risk but also increases the total cost of the position.
- Breakeven factors in the cost of both the stock and the put option.
Memory trick: Put Breakeven: Stock Cost + Put Cost.