Question

You buy a call with a strike of K=30 at a premium of 6.28, and you sell a call with a strike of K=38 at a premium of 3.5. What is the break-even point of the total position (that is including both options)?

{Enter your answer in dollars with 2 decimals, but do not use the "$".}

Answer 1

Ans: Premium paid on buying call option = $ 6.28

Premium received on selling call option = $ 3.5

If stock price is below or equal to strike price in case of selling a call option then premium collected will be profit to writer as buyer will not execute the option.

If stock price is above strike price in case of buyer of call option then (amount exceeding strike less premium paid) will be profit. In given case, strike price of buyer call option will be considered for calculating breakeven point.

Breakeven point = premium paid on selling call option - Premium received on buying call option + Strike price of selling call option

= $ 6.28 - $ 3.5 + $ 30

= $ 32.78

If stock price is $ 32.78 , then call option is exercised that results in net loss of $ 32.78-$30-6.28 = -$3.5

and profit from buying call option = $ 3.5, net amount will be Zero