Question

You write one February put option on Apple stock for a premium of $5 with a strike price of $70. What is the break-even price of this position?

A) $65

B) $75

C) $5

D) $70

Answer 1

Analyzing the question,

if you are write a put option means you should compulsorily buy a stock if other party with whom you entered , if he exercises the contract.

for the risk you taken , at the time of contract , you will be receiving a premium of $5

Take an example at the expiry date,

1. If the stock price > strike price

other party will lapse the contract and sell at the market at higher price, then, yow will gain of $5.

2. If Stock price < strike price, other party sells to you at strike price at higher rate rather than selling at open market at lower price.

Therefore, Break even price is $65

Explanation : IF stock priceis $65 at expiry date

pay -off for writer

holder will excersise the option and you have to compuilsorily buy at $70,

Since you already received premium of $5, youe net outflow is $65.