Series 7 practice questionhardOptions — Collar Maximum Loss Scenario
Using the same collar from the previous scenario (stock at $70, 65 put at $3, 80 call at $4), if the stock drops to $50 at expiration, what is the investor's loss?
- A$400✓ Correct answer
- B$500
- C$200
- D$1,900
Explanation
Why A — $400
The put is exercised at $65: stock loss = $70 - $65 = $5. Net premium = $4 received - $3 paid = $1 credit. Net loss = $5 - $1 = $4 per share, or $400. The put limits losses below $65, and the net credit from the collar reduces the maximum loss. Without the collar, the loss would have been $2,000.
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