A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even?

Question

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even? ​

Quizplus · Accepted Answer

To break even on a put option, the stock price must be below the exercise price by at least the amount of the premium paid. Here, the exercise price is $30, and the premium is $4, so the break-even stock price is $30 - $4 = $26.

A Speculator Purchases a Put Option for a Premium of $4