Explanation:
A bear put spread is constructed by buying the higher-strike put and selling the lower-strike put.
$28 put: cost = $2$25 put: premium received = $1$2 - $1 = $1For stock prices between the strikes ($25 < S < $28), the payoff of the spread is:
$28 - S$Break-even occurs when payoff = initial cost:
$28 - S = 1$So the strategy breaks even at a future stock price of $27.
Therefore, the correct answer is B.
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Q-184.2. Assume two OTM put options on a stock with a current price of $30: the first put option has a strike at $25 and costs $1, the second put option has a strike at $28 and costs $2. Ignoring the time value of money, if an investor enters a BEAR SPREAD trade, at what future stock price does the strategy break-even (break-even is when the strategy’s profit is zero)?
A
$26
B
$27
C
$28
D
$29