Series 7 practice questionhardOptions — Combination Strategy
An investor buys 1 RST Feb 40 call at $3 and buys 1 RST Feb 35 put at $2. At expiration, RST is at $30. What is the gain or loss?
- AGain of $500
- BLoss of $500
- CGain of $0 (breakeven)✓ Correct answer
- DLoss of $300
Explanation
Why C — Gain of $0 (breakeven)
This is a long combination (different strikes). Total premium = $3 + $2 = $5. The call expires worthless. The 35 put is worth $5 ($35 - $30). Net result = $5 intrinsic - $5 total premium = $0 (breakeven). The lower breakeven for this combination is $30 ($35 - $5), so the investor is exactly at breakeven.
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