Question

3. An investor is bearish on natural gas and decided to long a put with a strike price of $3.25. If the option was purchased for a price of $0.13 and current spot price of natural gas is $3.37, what is the break-even point for the investor? (Hint: Break-even point is the price of natural gas at which the investor will have exactly zero profit or loss. Be sure to consider the effect of the option premium.)
4. $3.12
5. $3.24
6. $3.25
7. $3.37
8. $3.50

Answer 1

Answer

Strike Price(X)=$3.25

Option Price=$0.13

Spot Price=$3.37

Break even point is price where investor has zero profit and zero loss.

So Break even point (In case of long put)=Strike Price-Option Price

=3.25-0.13

=$3.12

So Break even point = $3.12

Explanation

If Price is less than $3.12, dealer will end up in profit

If Price is more than $3.12, dealer will end up in loss

Example

Future Spot Price	Strike Price	Action	Profit/(Loss) from option	Purchase price of option	Profit/(Loss)
3.13	3.25	Exercise	0.12	0.13	-0.01
3.11	3.25	Exercise	0.14	0.13	0.01