kim226

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.

kim226

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 Gain

Maximum 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.

kim226

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.