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The shape of a protective put payoff diagram is most similar to a:
A)
long call.
B)
short call.
C)
covered call.



The payoff diagram for a protective put is like that of a call option but shifted upward by the exercise price of the put.

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An investor buys a share of stock at $33 and simultaneously writes a 35 call for a premium of $3. What is the maximum gain and loss?
Maximum GainMaximum Loss
A)
$5$30
B)
unlimited-$33
C)
$2-$35



The maximum gain on the stock itself is $2 ($35 − $33). At stock prices above the exercise price, the stock will be called away from the investor. The gain from writing the call is $3 so the total maximum gain is $5. If the stock ends up worthless, the call writer still has the call premium of $3 to offset the $33 loss on the stock so the total maximum loss is $30.

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An investor buys a 30 put on a share of stock for a premium of $7 and simultaneously buys a share of stock for $26. The breakeven price on the position and the maximum gain on the position are:
Breakeven price Maximum gain
A)
$33 unlimited
B)
$21 $11
C)
$37 $11



To break even, the stock price should rise as high as the amount invested, $33 ($26 + $7). The maximum gain is unlimited, as the gain will be as high as the increase in the stock price.

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