Answer-first summary for fast verification
Answer: $23.50 or $37.50
The answer is **C**. This position is a **strangle** (long call and long put with different strikes). - Initial cost = $2.65 + $1.85 = **$4.50** - Break-even on the upside occurs when the call's intrinsic value equals the initial cost: - $S - 33.00 = 4.50$ - $S = 37.50$ - Break-even on the downside occurs when the put's intrinsic value equals the initial cost: - $28.00 - S = 4.50$ - $S = 23.50$ Therefore, the trader breaks even at **$23.50 or $37.50**.
Author: Manit Arora
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Question 606.2
A trader buys a call option with a strike price of $33.00 and a put option with a strike price of $28.00. Both options have the same maturity. The call costs $2.65 and the put costs $1.85. At what stock prices does the trader break even on profit? Please note: profit = payoff minus the initial cost without regard to the time value of money. [this is a variation on Hull 10.12]
A
$25.00
B
$39.00
C
$23.50 or $37.50
D
$21.75 or $39.00
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