SIE Exam Question 326: Answer and Explanation

Question: 326

An investor sells short 100 shares of XYZ stock at 61 and buys 1 XYZ 65 call for 1.50 When the market price of ABC is 62. What is the investor's breakeven on the combined positions?

• A. 60.5
• B. 59.5
• C. 63.5
• D. 62.5

Correct Answer: B

Explanation:

B - When an investor buys a call to protect a short stock position, the investor will breakeven when the stock price is equal to the price at which the stock was sold short minus the call premium paid. 61 – 1.50 = $59.50. The investor is bearish and will make money only when the short position can be covered at a price below this point because of the premium that was paid for the call.