SIE practice questionhardOptions — Protective Put Calculation
An investor buys 100 shares of DEF at $75 and buys 1 DEF 70 put at $3. What is the maximum loss on the combined position?
- A$7,500
- B$300
- C$500
- D$800✓ Correct answer
Explanation
Why D — $800
Maximum loss = (stock purchase price - put strike price) + put premium = ($75 - $70) + $3 = $8 per share = $800. The put guarantees the ability to sell at $70, limiting the stock loss to $5/share, but the $3 premium is an additional cost. Without the put, the maximum loss would be $7,500 (stock goes to $0). The put provides a 'floor' at $70 minus the premium cost.
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