Question

Consider:

(a) Stock trades for $100; (b) Calls and Puts with exercise prices of $100 trade at prices of $9.42 and $8.1 respectively.

If a person buys a $100 call and a $100 put, what is her lower break-even point? Please answer correctly up to two decimal places.

Answer 1

Solution:

Stock trades for $100;

Calls Price: $ 9.42 and Puts Price: $ 8.1 with exercise prices of $100

If a person buys a $100 call then he must pay $ 9.42 for the call

And if a person buys a $100 put then he must pay $ 8.10 for the put

In total, he must pay $ 17.52 (i.e. $ 9.42+$8.1) for buying both call and put option together

Therefore, for making profit, the stock must go either direction (up or down) by at least more than $17.52 for making the profit. Hence, the lower break-even point: $ 17.52.