Series 7 practice questionhardOptions — Comprehensive Scenario
An investor buys 100 shares of XYZ at $50, writes 1 XYZ Jun 55 call at $3, and buys 1 XYZ Jun 45 put at $2. If XYZ drops to $38 at expiration, what is the investor's total loss?
- A$400✓ Correct answer
- B$600
- C$1,200
- D$200
Explanation
Why A — $400
This is a collar. The put is exercised, selling stock at $45. Stock loss = $50 - $45 = $5 per share. The call expires worthless (stock below $55). Net premium = $3 received - $2 paid = $1 credit. Total loss per share = $5 - $1 = $4. Total loss = $4 x 100 = $400. The collar limited the loss — without it, the loss would have been $1,200 ($50 - $38 = $12 per share).
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