Series 7 practice questionmediumOptions — Strangles
An investor buys 1 ABC Aug 40 put at $2 and buys 1 ABC Aug 50 call at $3 (long strangle). What are the breakeven points?
- A$35 and $55✓ Correct answer
- B$37 and $53
- C$38 and $52
- D$40 and $50
Explanation
Why A — $35 and $55
A long strangle has two breakeven points. Total premium = $2 + $3 = $5. Upper breakeven = upper strike + total premium = $50 + $5 = $55. Lower breakeven = lower strike - total premium = $40 - $5 = $35. The stock must move significantly beyond either strike to generate a profit.
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