Series 7 Exam Question 86: Answer and Explanation

Question: 86

An investor buys 1 TUV Aug 60 put for 7 and buys 1 TUV Aug 55 call for 2. What are the investor's break-even points?

• A. 53 and 57
• B. 51 and 64
• C. 55 and 60
• D. 46 and 69

Correct Answer: B

Explanation:

B. This strategy is a long combination (buy a call and buy a put on the same securities but with different expiration dates and/or strike prices). For straddles and combinations, there are two different break-even points: one on the way up and one on the way down. The first thing you have to do is add the two premiums and then call up (add the combined premiums to the call strike price) and then put down (subtract the combined premiums from the put strike price). Because this investor paid 9 (7 + 2) per share for the premiums, the break-even points are 64 (55 + 9) and 51 (60 - 9).