A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4 . Suppose that a trader buys two call options and one put option
The breakeven stock price above which the trader makes a profit is
A. $35
B. $40
C. $30
D. $36
A
When the stock price is $35, the two call options provide a payoff of 2×(35−30) or $10 . The put option provides no payoff. The total cost of the options is 2×3+ 4 or $10 . The stock price in A, $35, is therefore the breakeven stock price above which the position is profitable because it is the price for which the cost of the options equals the payoff.
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