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 below which the trader makes a profit is
A) $25
B) $28
C) $26
D) $20

Question

Quizplus · Accepted Answer

When the stock price is $20 the two call options provide no payoff.The put option provides a payoff of 30−20 or $10.The total cost of the options is 2×3+ 4 or $10.The stock price in D,$20,is therefore the breakeven stock price below 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