Series 7 practice questionmediumOptions — Protective Put Calculation
An investor owns 100 shares of QRS purchased at $75 and buys 1 QRS Dec 70 put at $3. What is the maximum loss on this combined position?
- A$300
- B$500
- C$800✓ Correct answer
- D$7,500
Explanation
Why C — $800
The maximum loss is the stock loss down to the put strike plus the premium paid. Stock loss: $75 - $70 = $5 per share, plus $3 premium = $8 per share. Total: $8 x 100 = $800. The put protects against losses below $70, acting as a floor on the stock's value.
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