Series 7 Exam Question 292: Answer and Explanation

Question: 292

Use the following exhibit to answer this question:

NY Close	Strike	Calls		Puts
ABC		Sep	Dec	Sep	Dec
50.50	40	12	14.13	0.75	1.50
50.50	50	1	2.50	0.88	1.75
50.50	60	0.50	0.75	10	12

What is the break-even point for an investor who purchases an ABC Dec 60 put?

• A. 48
• B. 50
• C. 70
• D. 72

Correct Answer: A

Explanation:

A. To determine the break-even point for a put option, you have to subtract the premium from the strike price of 60. To find the premium for the Dec 60 put, look under the last column. The last column is for December puts. Next, find the 60 strike price from the second column — it's in the bottom row. If you intersect the bottom row with the last column (the lower right-hand corner), you see that the premium is 12. By subtracting 12 from 60, you get a break-even point of 48.