A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4.Suppose that a trader buys two call options and one put option.The breakeven stock price above which the trader makes a profit is
A) $35
B) $40
C) $30
D) $36

Question

Quizplus · Accepted Answer

When the stock price is $35,the two call options provide a payoff of 2×(35−30)or $10.The put option provides no payoff.The total cost of the options is 2×3+ 4 or $10.The stock price in A,$35,is therefore the breakeven stock price above which the position is profitable because it is the price for which the cost of the options equals the payoff.

A One-Year Call Option on a Stock with a Strike